Consumer debt in the current economy

Recession, pandemic create unusual environment

Everyday Stewardship |
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In normal times, the advice people hear about their consumer debt usually follows a familiar pattern. Focus on your highest-interest debt first, or pay off your smallest balance first.

But we’re in an economic recession in the middle of a pandemic. And in the current environment, different approaches to consumer debt may be appropriate.

Here are some issues to think about:

  • Setting low interest rates has been a key component of the Federal Reserve’s response to the coronavirus crisis. Reviewing rates on outstanding debt and refinancing / consolidating household debt to take advantage of these rates may be sensible in order to lower total interest expense.
  • In considering a refinance, be sure to understand all costs involved. If transaction costs – such as closing costs on a real estate loan – will offset the savings from a lower interest rate, it may be better to maintain the original loan.
  • Carefully consider any changes to the term of a loan. A lower interest rate over a longer term may not save you money in total interest expense.
  • Millions of jobs have disappeared this year, and many of them won’t come back. If a household’s emergency fund won’t provide for 6-9 months of living expenses in the event of job loss, it may be better to reduce excess debt repayments to build an emergency fund more quickly.
  • Paying down debt as quickly as possible usually is a good approach. But debt management should not be viewed in a vacuum during a time when the likelihood of income declines or job loss has increased significantly for much of the population.

Let us give you a hand

Everence can review your situation and develop a customized plan. Visit everence.com/financial-planning to get started.

Disclosure

Advisory services offered through Investment Advisors, a division of ProEquities Inc., Registered Investment Advisors. Securities offered through ProEquities, Inc., a registered broker-dealer, member FINRA and SIPC. Products and services offered through Everence Trust Company and other Everence entities are independent of and are not guaranteed or endorsed by ProEquities Inc., or its affiliates. Investments and other products are not NCUA or otherwise federally insured, may involve loss of principal and have no credit union guarantee.