What Is Deleveraging?

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Deleveraging is the process of reducing leverage by a business, household, or government by bringing down debt. Often, deleveraging occurs during tough economic conditions and may be accompanied by a sale of assets to pay down debt.

Key Takeaways

  • Deleveraging is the process of reducing leverage by bringing down debt, sometimes by selling assets.
  • Consumer deleveraging can take place by prioritizing repaying debt over spending.
  • Consumer deleveraging in an economy can reduce total spending and increase the savings rate.
  • Sometimes having leverage makes sense, and deleveraging isn’t always beneficial.

How Deleveraging Works

Deleveraging is a measure taken by a business, household, or government to reduce its financial leverage. “Leverage” is the financial term for debt used to acquire assets or investments. Simply speaking, you’re using money you don’t have, and have to borrow. Deleveraging is the opposite. It is the process of paying off that debt. In worst-case scenarios, that is done by selling existing assets.

Types of Deleveraging

Any entity, a consumer, a business, an investor or even a government can undergo the process of deleveraging. Here are how different types of deleveraging works.

Deleveraging for Consumers

Consumers take on debt for many different reasons. That could include mortgages, auto loans, or credit card debt. Sometimes economic conditions or a household’s own financial situation can make the size of the debt difficult to manage. That’s when consumers can consider deleveraging.


Deleveraging for consumers occurs when they prioritize repayment of their debts above spending when they feel that the level of their debts may not be sustainable for them.

While a shift from spending to servicing debt may be the most common form of deleveraging, other ways consumers can deleverage is by taking on less new debt or even writing off old bad debts.

One way for consumers to measure their leverage is by looking at their household debt service ratio. That is calculated by dividing the total quarterly household debt payments by the total household disposable income.

Consumer deleveraging can also be used in a macro-economic context. When households in an economy start paying off debt en masse, it is called deleveraging. Typically, when this happens, consumer spending falls, because funds that could be spent are used to pay down credit cards or auto loans instead.

An example of consumer deleveraging is the Great Deleveraging that followed the Great Recession of 2008. Total household debt doubled from 2000 to 2008, then consistently fell through 2014. Less new debt was issued and existing debt was paid off; consequently, consumer spending fell and the savings rate went up. In fact, the savings rate in the U.S. more than doubled from a low in 2005 to 2011.   

Some economists believe that consumer deleveraging is harmful to the economy—it reduces GDP after all. When consumers don’t spend, business revenue goes down and employees are laid off. On the other hand, some economists believe that consumer deleveraging and an increased savings rate is a benefit to the economy over the long term. Economies grow by building up capital, and capital can only be built up with savings.

Deleveraging for Governments

Governments borrow money to spend on public programs (among other needs), and government debt usually is considered safe. However, governments also need to deleverage if they find themselves in positions where the amount of money they borrow becomes untenable. A default on debt by a government could have far-reaching economic consequences.

Deleveraging for Businesses

Leverage in businesses can be measured using a leverage ratio such as debt/equity. The ratio is calculated by dividing total liabilities by total stockholders’ equity. Anything over 2 is generally considered overleveraged.


A company that is overleveraged may see a ratings downgrade for its debt, further fanning fears of a default on the debt it has issued, which can, in turn, adversely affect its stock price. The company could deleverage by using its cash flow to address some of its debt obligations.

Portfolio Deleveraging

Institutional investors such as hedge funds often have highly leveraged positions. In times of market volatility, leveraged positions can lead to losses. Portfolio deleveraging then is used by such investors to pare down risky positions.

What It Means for Individual Investors

Leverage in itself is not necessarily a bad thing; it's the opportunity cost that matters. It’s possible to have a highly leveraged personal balance sheet if, for example, you just bought a house. But that house payment replaces a rent payment and will eventually be a big unencumbered asset.

On the other hand, individuals who don’t own a house but have a lot of student loans, credit card debt, or auto debt would probably be better off deleveraging. It’s easy to find out.

Over the long run, the S&P 500—the representative index of the stock market—has delivered almost 10% per year over a 10-year period as of October 2022. If you have a car loan with a 2.5% rate or a student loan with a 4% rate, it’s an easy choice whether you should pay down the debt or invest in the stock market. Depending on your financial situation, you might be able to chip away a little toward both investment and paying down debt.

It may also make sense not to deleverage if you are saving for an emergency fund or putting funds into an account to be used for a future down payment. The key is to be mindful with your money and deleverage when it’s the best option for you.

Frequently Asked Questions (FAQs)

What is forced deleveraging?

Forced deleveraging is when a consumer or business is compelled to liquidate assets in order to pay down debt or restructure the terms of their debt to avoid insolvency.

How to invest during deleveraging?

If consumers, businesses, and portfolios are looking to deleverage, as of October 2022, all indications are that the economy is headed for a slowdown. Typically, long-term investors need not make too many adjustments to their portfolio on that account. But if you are looking for investment opportunities, consider ways to diversify your portfolio, or think about investments in defensive sectors such as consumer discretionary that typically do well in market downturns.

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The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Reserve Bank of Boston. “U.S. Household Deleveraging: What Do the Aggregate and Household-Level Data Tell Us?

  2. Board of Governors for the Federal Reserve System. “Deleveraging: Is it Over and What Was It?”

  3. The Federal Reserve Board. “Household Debt Service and Financial Obligations Ratios.”

  4. UBS. “The Decade Ahead: Investing With Confidence in a World Focused on Reducing Its Debt.”

  5. McKinsey & Company. “Is a Leverage Reckoning Coming?

  6. Office of Financial Research. “The Life of the Counterparty: Shock Propagation in Hedge Fund-Prime Broker Credit Networks.”

  7. S&P Dow Jones Indices. “S&P 500.”

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