Time is ripe for repaying debt
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
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 Bankrate.com 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.
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
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.