I recently interviewed Sundeep Yerapotina, Chief Risk Officer (CRO
What advice do you have for consumers in today’s environment? Any advice on managing your existing debt or for those planning to take out new loans?
On the bright side, many consumers and households could take advantage of the low mortgage rates until a few months ago to refinance their existing mortgage loans or buy new homes. With those rates locked in for the next 30 years, it certainly puts those households in a good position in terms of the monthly repayment burden.
Now, it’s critical that consumers review their household balance sheets to account for higher expenses as a result of inflation, but also begin to account for higher repayment burdens on their existing and future variable rate loans as they plan for any disruptions in their sources of income. in the near future.
Given the high likelihood of a recession in the coming year, consumers should strive to build up enough savings to support the loss of their income for up to three or four quarters.
From a credit management perspective, consumers should first classify their existing debt based on the nature of the credit and interest rates. First, pay attention to debt with a variable interest rate or high interest rates, such as credit cards. Consumers should explore options for consolidating such debts into a fixed, lower-rate loan so that they can lessen their repayment burden. Given the appreciation of home values, it may be prudent to take out a home equity line of credit at a favorable rate to consolidate these debts. Second, consumers should reduce discretionary spending and delay personal projects, such as nonessential home remodeling, that require taking on additional credit. Finally, there are some credit decisions that we may not be able to delay, such as taking out a student loan for a child’s education or a loan for medical emergencies. Consumers should plan to refinance those loans when interest rates fall in the future.
From your point of view, what are some of the medium and long-term risks that need to be considered?
It’s a great question. The US economy faces some risks in the medium and long term. In my opinion, the following are some of the main risks:
- Geopolitical tensions: Diplomacy and the de-escalation of political conflicts will be vital to maintain the focus on economic progress and other imminent challenges facing the country, such as climate change.
- Sovereign debt: With our national debt exceeding $31 trillion and reaching more than 120% of GDP, the response of the government and the central bank after the onset and after the next recession, and in the long term, will be critical.
- Sustained trade deficit: The sustained U.S. trade deficit is hurting the economy in general and the nation’s middle class in particular because of the long-term trend of job losses in many industries, stagnant wages and real incomes, lower trade competitiveness of US industry and changes in the sector. balance of power with major trading partners.
- Climate change: The disruption that climate change is causing to human living conditions and economic difficulties calls for urgent measures. Not to mention its serious impact on our natural ecosystems and flora and fauna.
- Inflationary pressure due to limitations in the supply of natural resources: I believe the answer lies in continued innovation in addition to the evolution of the standard of living.
- Social and political division: The wealth disparity and economic strain on the working class will continue to create more differences of opinion on various issues between segments of our society. The deepening schism will limit consensus on key policy measures. A lack of long-term focus and decisive action, for example on the issues mentioned above, will only increase those risks.