As inflation soars and interest rates climb, many Americans are bracing for the possibility of a recession. Despite low unemployment rates, many are grappling with the highest inflation pressure the United States has seen in half a century.
If you have debt that you need to pay off and you’re struggling to make ends meet under current economic conditions, you may be wondering how to pay off your debt while staying financially afloat. It is important to pay off debt before a recession, especially variable or high interest rate debt. However, saving money during uncertain economic times may be more important, especially if you don’t have much of a safety net.
If you’re unsure how to manage your debt during a recession, the information below will help you make the right financial decisions for you.
How to Manage Debt During a Recession
With a potential recession looming and many Americans struggling to meet their monthly expenses, it can be difficult to decide whether to focus on building up your savings or trying to pay off high-interest debt before the crisis hits. economy does not become more unstable.
The answer depends on your current financial stability. If you are financially secure and have emergency savings, you should prioritize paying off high-interest debt while the economy is more stable. This is especially true if you have a variable interest rate loan or line of credit.
If you’re struggling to make ends meet or don’t have a steady income or emergency fund, it’s probably best to focus on saving. You should always make the minimum payments on your debts to avoid damaging your credit and racking up charges, but ultimately establishing an emergency fund is more important than paying off the debt.
If you’re focused on paying off your debt before the economy becomes more unstable, here are some methods that might help.
Paying Off Credit Card Debt Before a Recession
If you have credit card debt, you should prioritize paying it off because credit cards carry higher interest rates than most other types of debt. The current average credit card interest rate is 17.85%, and rates are even higher for low credit borrowers. Since credit cards are variable rate products, the interest rate on your credit card debt is likely to continue to rise if the Federal Reserve raises interest rates again as expected.
It’s worth talking to your lender and seeing if you can negotiate a lower interest rate, especially if your credit score has improved since you applied for your card. It’s also a good idea to write down how much you owe on each credit card and the interest rate and minimum monthly payment for each card. You should do this if you can completely pay off your debt or at least make a monthly payment above the minimum.
If you’re struggling to make minimum payments and can’t negotiate with your lender, it may be worth considering debt consolidation or working with a debt relief company.
Debt repayment before a recession
Unlike credit cards, most personal and auto loans come with fixed interest rates. This means that borrowers who already have these loans don’t have to worry about their interest rates rising during a recession. Additionally, many personal loans come with prepayment penalties if you pay off your loan early.
If you have a fixed rate personal or car loan and can afford to make the monthly payments, you just have to keep doing it. However, if you’re struggling to make monthly payments, it might be worth looking for a low-interest product and transferring your debt.
If you have good to excellent credit, you can talk to a financial advisor about transferring your loan to a 0% APR balance transfer credit card or home equity line of credit to get an interest rate. lower. However, you should only do this if you have good credit.
If you don’t have good credit and you’re worried about paying off your personal or car debt, your best option is to rework your budget and prioritize paying off your debt. This is especially important if you have a secured loan so you don’t risk losing your car, home or other valuables.
What if you can’t afford to pay off your debt?
If, like many Americans, you’re struggling to manage your debt and worried about the added financial strain a recession could bring, you still have options. If you’re finding it increasingly difficult to manage paying off your debts in addition to your other expenses, consider one of the following options.
Debt consolidation allows you to combine several high-interest debts into one new loan, ideally with a lower interest rate. This new loan is then used to repay all your debts, and you only have to make one monthly payment. Many debt consolidation lenders offer to pay your creditors directly.
Debt consolidation is particularly attractive if you have variable interest credit card debt and may qualify for a fixed interest debt consolidation loan. You can also consolidate debt by transferring the balance to a credit card with a 0% APR introductory period. You should only consolidate your debts if you are sure you qualify for a lower interest rate than what you are currently paying.
If you decide to work with a debt settlement company, you will have to stop paying your creditors while the debt settlement company negotiates with them on your behalf. Ideally, your creditors will agree to a lower sum and you will establish a payment plan.
However, debt settlement is risky and should only be pursued as a last resort. Your creditors don’t have to work with a debt settlement company and could sue you for default. Additionally, defaulting on your debt payments will hurt your credit score and your ability to borrow money in the future.
If you’re struggling with debt and need a professional opinion on your situation, you should consider working with a nonprofit credit counselor. Many reputable credit counseling agencies will advise you for little or no cost. You can also set up a debt management plan with these agencies where you pay them monthly and pay the lenders on your behalf. This service simplifies the process for you but requires an additional monthly fee.
Talk to your lender
If you’re having financial difficulties, it’s worth contacting your lender to negotiate a temporary payment break or a reduced interest rate. Some lenders may even offer relief options in the event of an economic downturn.
The bottom line
Ultimately, the best things you can do to financially prepare for a recession are to create an emergency fund, pay off or consolidate high-interest debt, and establish a consistent budget. Above all, having an emergency fund to always cover your basic needs is the most important thing. Without this safety net, you could take on more debt in times of financial difficulty. If you find it difficult to repay your debts monthly, consider one of the alternatives described above. However, it may be a good idea if you have variable interest debt and can afford to pay it off.