New Zealand markets open in 7 hours 27 minutes
  • NZX 50

    -10.52 (-0.09%)

    +0.0004 (+0.07%)

    +18.50 (+0.25%)
  • OIL

    +0.49 (+0.44%)
  • GOLD

    +2.90 (+0.16%)

Debt refinancing increasingly an option for households, expert explains

Commonwealth Co-Founder and Executive Director Tim Flacke joins Yahoo Finance Live to discuss increasing savable funds through debt refinancing, how households can build up savings, and establishing financial stability with consistent repayment rates to lenders.

Video transcript

KARINA MITCHELL: Inflation is starting to eat into the savings cushions created by pandemic relief for many Americans. A new report highlights ways to free up vital additional monthly funds for low and moderate-income households. Here to help break that down is Tim Flacke, a Commonwealth co-founder and executive director.

Tim, thanks so much for joining us. You say one way to save more money is by refinancing debt. Total debt in the US grew to about $15 trillion in the third quarter of 2021. It was led by mortgages, auto loans, student debts, as well as an increase in credit card debt as well. So broadly speaking, is now the best time to think about refinancing and getting better debt options ahead of all the rate hikes that we know are to come?

TIM FLACKE: Yeah, well, you're absolutely right. If we think there's reason to believe that our debt is going to get more expensive, which of course, rate hikes would suggest, then it's a natural time to think about refinancing that debt and, just more broadly, to be cognizant of our debt and what role it plays in our financial lives.

And I think you already made the point. We have a lot of debt, a lot of consumer debt in this country. We also know that we don't have a lot of savings. A widely publicized figure from the Federal Reserve makes that point that, really, only about 1/3 of us would have $400-- or I should say that the other way-- wouldn't have $400 to manage an emergency. And somewhere north of 50% of us report that we live paycheck-to-paycheck.

So we, in our work, are always looking for those moments that might allow for building financial security. And I think debt refinancing, we have some new research suggests, may be one of those moments.

KARINA MITCHELL: Yeah. And you launched a pilot program focusing on low and moderate-income households. For that group, higher inflation is definitely outpacing any sort of wage growth. In fact, the other statistic I have is 40% of those earning less than $50,000 don't have enough for a month of emergency savings. So then how vital is it for that particular group particularly to reduce debt payments?

TIM FLACKE: Well, I think you're absolutely right that those people who are living in that under $50,000 range or the paycheck-to-paycheck description I alluded to a moment ago, every dollar matters.

And just to say a word about this pilot study that we conducted together with a Hebrew free loan society in New York, we had a chance to actually take people who were in debt and making payments. And for 200 of them, we cut those payments in half and doubled the repayment time. And what we were interested in was, would that create an opportunity for households to build up some savings and, more broadly, to be more financially secure.

And we were very excited to find that, in fact, the rate of people who were saving money-- and we mean saving for the short term, for emergencies-- for the most part, actually doubled among that group that we were able to cut their repayment in half. So we think this is actually really exciting for the lenders who stand behind that $15 billion that you described to say, if you are trying to work with your customers to help them be more financially secure, which we hope you are and we think is a sound business strategy, thinking about restructuring those debt payments, if done carefully and on favorable terms, may provide a real window of opportunity to help your customers build up their savings and build up their financial security.

And just one more point. Interestingly, we think that's an opportunity for lenders also. The people that we interviewed who participated in this study told us that they were more likely to make regular payments. They were more interested in hearing about other financial products and services from their lender. And crucially, they recorded significantly higher financial well-being. That just stands to reason that we all feel good about the providers, the companies that are helping us find our way to that greater financial well-being and less financial stress.

KARINA MITCHELL: Yeah, your report says it leads to a lot of psychological well-being as well as being financially better-off and in a better position. My question is, why should a lending institution go out and try and get you a better loan repayment option? Because aren't they then losing out on that income? What's in it for the lenders themselves?

TIM FLACKE: Yeah, of course, it's a great question. Obviously, lenders need to be repaid. And that is their business, after all, to lend. And I think it's what I started to say a moment ago, that rates of repayment appear to be higher and more consistent among those who have this longer, extended repayment period, which stands to reason. But we now have data to back that up.

And beyond that, the goodwill that seems to come from Lenders who are able to make this sort of change and the openness that we heard from the people we interviewed to hear about other products and services from those Lenders create opportunity.

And I'd just take it a level up. I think for many financial service firms and financial service providers, increasingly, we see a movement towards the outcome that you are trying to help your customers achieve. And perhaps the most important one, for those of us who are living close to the edge, is that greater feeling of financial security.

So in a slightly bigger picture, it's a real opportunity for lenders to step up and say, we can offer you something concrete that our evidence suggests will allow your customers to build up that crucial short-term savings, to pay down some of the even more expensive debt, and therefore, to have that greater financial well-being and build a much stronger bond with your customers.

KARINA MITCHELL: Yeah, absolutely. And it is very motivational to be able to get a handle on those finances and know you're able to make those payments. So debt consolidation and reduction, a very good thing to be focusing on. OK, we will leave it there. Tim Flacke, Commonwealth co-founder and executive director, thank you so much for stopping by today. Alexis.?

ALEXIS CHRISTOFOUROS: All right. Thanks, Karina. Coming up next--

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting