to make a trade for new wheels. To stimulate sales, automakers’ finance companies are offering great financing deals: in October, three-year, interest-free loans were available.
With rates at their lowest since the 1960s, times are bounteous for borrowers, lean for lenders
While investors are reviewing their 401(k) plans, they shouldn’t forget about other areas of their finances that need fixing. Everyone should look at the debt they have and see if they can find better interest rates. After the terrorist attacks of September 11, the Federal Reserve put the pedal to the metal to keep the economy from stalling. Within three weeks, the key federal funds rate was cut for the eighth and ninth times this year. Since January, it has toppled from 6.5% to 2.5%, a 39-year low. Other interest rates fell in sync, making this a great time to be a borrower rather than a lender.
LOW CREDIT CARD DEBT
The good news is that most credit cards impose variable interest rates, so they’ve come down as the Fed has announced cut after cut. The bad news is that the average rate was around 14% during fall 2001, and that’s 14% after tax, because interest on credit card balances isn’t deductible.
“Pay off your credit card debt as rapidly as possible,” says Giles Almond, a financial planner with Matrix Wealth Advisors (www.matrixwealth.com) in Charlotte, North Carolina. “You can use a home equity loan to pay it off, replacing credit card debt with lower-rate, tax-deductible home equity debt.” A similar move is to refinance a home mortgage for an amount greater than the old loan and use the excess proceeds to pay off your credit card debt.
Almond suggests yet another alternative. “You probably get credit card offers promising you no interest or low interest rates for a few months,” he says. “Take advantage of those offers by rolling your existing credit card debt into new cards, at low rates. When the initial offer expires, roll [the debt over] to another low-rate card.”
Such loans generally are variable rate, so they’ve fallen this year along with other interest rates. Therefore, this might be a good time to call on your friendly banker.
If you already have a small business loan in place, lower rates mean lower required payments. “You probably have two options,” says Almond. “You can make smaller payments or you can make the same payments and pay down your loan faster.”
Which is better? “That depends on your circumstances,” says Almond, “but in today’s uncertain times, leveraging your business by carrying large loans may be risky. I’ve never seen anyone go bankrupt by paying down debt.”
The interest on student loans may be deductible, for low- and middle-income taxpayers. For installment loans, which include monthly payments for boat loans, vacation loans, etc., interest is not deductible.
“If you can deduct the interest, you might want to keep these loans in place,” says Almond. “That’s especially true for variable rate loans, where the interest rate has dropped.” If the interest isn’t deductible, you may be better off