Should you pay down your debt?

The question of whether a person should pay down debts comes up often, when there are forecasts that suggest unemployment rates and consequently debt defaults will rise dramatically in future years. I know some people say, definitely, “Yes”. I would say, “It depends.”

Clearly, at this point, interest rates you can get in a bank are low, and the long term value of most stocks and bonds is very iffy. So from that point of view, if you have assets that aren’t going to earn much in the future, and a smaller amount of debt, you may want to offset the assets against the debt. But not everyone is in that position. And not all debts are not equally important to pay back.

Student loans. Interest rates are generally pretty low, and lenders don’t have much they can take back in the case of default, especially if the reason you cannot pay is because you are unemployed. So I don’t see a point to specially paying them back.

Credit cards and other unsecured debt. The issue with credit card debt is generally the high interest charges that the banks charge you now. Because of this, running up credit card debt is not a good idea, and paying down debt does make sense, regardless of what happens in the future. But if you lose your job and don’t have a way of paying the funds back in the future, there is not much the unsecured lenders can do. So from that point of view, it doesn’t seem like a person has a lot to worry about, if he or she has credit card debt, and should become unable to pay the debt in the future.

Auto loans. With auto loans, if you should lose your job, and not be able to repay the loan, the car might be repossessed. If you are thinking ahead, buying a less expensive car might be an option, so as to reduce the need for a loan, and thus reduce the likelihood of repossession. Defaulting on lease payments would also likely result in repossession. If you want to be sure to continue to have a vehicle, and think layoffs or reduced income (if you sell services, and can sell fewer of them) would be a problem, trading in for a smaller, older, more fuel efficient car might be an option. If you need a truck for your business, and fear reduced business ahead, paying down the truck loan, so as to be sure it is not a problem in the future, might be an option. But if you have a second personal vehicle that you really don’t need and can’t afford (and haven’t paid much on now), I don’t think I would go out of my way to pay down the loan.

Home mortgages. Here, it is not as clear to me what a person should do. If you are close to paying off your loan, and have amounts in your bank account that are earning little interest, it is clearly a wise thing to do. But if you are a long way from paying down your loan, or the loan is for more than the value of the house (or both), I wouldn’t go out of my way to pay down the loan. I don’t see lenders as being to put everyone out on the street. Of course, if you are the first one to default, you may end up out on the street. And this is not what you want either.

One thing you may want to consider in paying down housing debt is where you really want to be located. If you are located in a desert area, where water is likely to be a problem in not very long, you may very well want to move. Now would be a good time to do it–or at least not pay down debt on your existing home. Similarly, if you want to move to be near children, perhaps to be in an in-law suite with one of them.

Debt to pay for new tools, gardening equipment, land for crops, water capture, etc. This may make sense in some cases, especially if you have the time and ability to follow through with your plans. But remember, others will likely not have what you have, and there is likely to be a problem with theft in the future.

Exactly how much debt pay-down or additional debt to do is a difficult question to answer, because we don’t know what our own personal circumstances will be, and we don’t know how conditions around us will be. But we need to make decisions based on the limited information we have to work with now.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to inadequate supply.
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26 Responses to Should you pay down your debt?

  1. Arthur Robey says:

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