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Time is ripe for repaying debt

Greg McBrideFor the time being, the Federal Reserve Board's Open Market Committee remains on hold with interest rates. With the future course of interest rates uncertain, what opportunity does this non-move present to you?

Uncertainty about war and economic well-being has been a boon to mortgage shoppers, with fixed mortgage rates lingering below 6 percent, near 35-year lows. Rates on home equity loans and home equity lines of credit are at the lowest point in the years Bankrate has been surveying such products.

And a quick perusal of the search engine finds a variety of sub-5 percent rate quotes for new-car loans and used-car loans alike, attractive alternatives to the masses unable to secure zero-percent dealer financing.

Regardless of when the next Fed move may come and which direction it may go, for now the reprieve from higher rates on all loan products remains in place. Not opening the window of interest rate opportunity further, as yet, but not closing it at all, is intended to leave sufficient space for additional spending and incurrence of debt by both consumers and businesses alike.

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Consumer confidence has suffered mightily, and the job market is as tenuous now as at any point in this economic downturn. Lacking the confidence or ability to continue spending and piling on debt, consumers should think instead of the interest rate opportunity as one for debt consolidation and debt repayment.

This was not the design of low interest rates, but the irony was noted by Dallas Federal Reserve President Robert McTeer in a speech to the Southern Economic Association on Nov. 24, 2002.

"You almost feel a moral dilemma about that because most of us do need to be saving more, but we're all in deep trouble if we start saving more because for the economy right now, we don't need more saving, we need more consumer spending."

Substituting the word "repaying" for "saving" drives home the same point.

The prevailing low rates on mortgages and home equity products have afforded many consumers the opportunity to consolidate higher interest rate debt, such as credit cards, onto lower rate loan products that carry the added advantage of tax deductibility of interest.

The additional cash generated by reducing monthly payments is widely credited with sustaining consumer spending. Continued low rates mean it isn't too late to join the crowd, shaving your monthly interest payments and giving the budget a well-needed trim.

But the additional cash created by consolidating debt can also serve another important purpose in these times. In this hour of debt burdens, an uncertain employment market and low interest rates, conditions are ripe for debt repayment as the wind is at the borrower's back.

Further, there is a snowball effect to debt repayment when interest rates are low as more of each dollar goes toward the principal, thus reducing the principal on which interest is charged the next month. The good news of historically low interest rates prevailing as far as the eyes can currently see means the process of diligent debt repayment will continue to accelerate.

Waiting or resisting the opportunity to consolidate and repay debt comes at a high cost. The debt burden will inevitably get heavier once interest rates begin to rise. In the meantime, take advantage of low interest rates to increase the pace of paying it back instead of racking it up.


-- Posted: Jan. 31, 2003

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