We all know too much credit, too easily given, helped trigger the financial crisis that led to the Great Recession.
With so much unemployment and economic uncertainty, many people are focused now on getting rid of debt: shortening their mortgages, avoiding car loans and paying down their credit cards.
But rates on many types of loans may never be this low again. Could some of us be missing our once-in-a-lifetime chance to lock in cheap money? Will you be kicking yourself in a few years because you didn't take advantage of this opportunity?
Consider what's available to people with good-to-excellent credit scores:
- Rates on 15-year mortgages have dropped under 4%, and traditional 30-year fixed-rate mortgages average around 4.5%. With a tax deduction and a moderate amount of inflation -- which has averaged 3% until recently -- the real cost of this money would be pretty close to free.
- Home equity loans and lines of credit are pretty low as well. The best rates on variable-rate HELOCs are between 4% and 5%, although some credit unions offer rates below 4%, said Greg McBride, a senior financial analyst for Bankrate.com. Rates are higher for fixed-rate home equity loans, he said, but still average between 5% and 6%.
- Auto loans can be had for a song, with "a number of large national and regional banks around the country offering rates below 4% on new-car loans and below 5% on used-car loans," McBride said. Check your credit union, too; mine offers a 3.99% rate for up to five years on both new and used cars. Some car manufacturers offer even lower rates, even 0%, on some models.
- The rate on subsidized federal student loans is 4.5% this school year and will drop to 3.4% next year. Again, with a tax deduction for the interest and anything close to normal inflation, this money would be free or nearly so.
- "Today's rates are extremely low if you can lock them in," said economist Sung Won Sohn, a professor at California State University, Channel Islands. "Rates aren't going to go down a whole lot more."
Sohn, however, is a lot more enthusiastic about reducing the cost of existing debt -- by refinancing home and auto loans, for example -- than he is about adding new debt.
There are a variety of reasons you should be cautious, including:
Any loan may be too expensive if you don't have a job. The unemployment statistics are grim: Officially, 14.9 million people, constituting 9.6% of the work force, were jobless in August. More than 6 million of those are considered long-term unemployed, having been out of work 27 weeks or more. An additional 8.9 million are involuntarily working only part time, and 1.1 million are "discouraged" workers who have given up their job searches. That's a big chunk of the working population and enough to make almost anyone leery about the security of his or her job.
Qualifying for a loan can be tough. Good credit scores may not be enough. If you want a refinance, for example, you'd better have at least 20% equity in your home and a stable, provable income. Home equity borrowing and "cash out" refinancing -- swapping one loan for a larger one -- require even more equity.
Near the peak of the housing market, a whopping 88% of mortgage refinances were cash-outs. Today, the rate is closer to 27%, the lowest share since mortgage agency Freddie Mac began tracking in 1985. That's because home values have plunged and lenders have gotten pickier about who gets money.
The specter of deflation looms. Inflation erodes the dollar's buying power, making it cheaper to repay loans with future, less-valuable dollars. Some economists, though, worry we'll see the opposite: falling prices, which should send a chill down the spine of anyone who borrows money. Deflation makes loans more expensive to repay, because each dollar is worth more over time.
Already, we're seeing deflationary pressures in the home, auto and electronics markets, as people hold off buying because they expect prices to fall more, Sohn said. He said he thinks the likelihood of at least some deflation is far greater than that of inflation.
"In a deflationary environment, the real burden of debt goes up," Sohn said. In addition to dollars gaining value, he said, "salaries don't go up and could go down."
That's why Sohn, other economists and financial experts are urging people to pay down their debts rather than add more.
Even the prospect of superlow federal student loan rates doesn't dissuade Zac Bissonnette, the author of "Debt-Free U," from his conviction that it's better to get through school without debt.
Continued: Education, the ultimate illiquid asset
Thanks goodness they finally quit sending junkmails conving me to refinance but when I went and applied they told me I was'nt qualified. They wasted their time and money sending junks but they alsdo bothered me a lot sorting the junks and filling my garbage canb.
