Although price increases are partly a reflection of generally favourable economic growth, long-term increases in inflation can be worrying for an individual, and for a good reason. Inflation directly impacts your personal finances, creating limits for personal budgets and spending. But what happens when you need some extra cash on hand, and should you be taking out a personal loan during high inflation rates?
This blog covers everything you need to know about taking out a personal loan during inflation, including whether you should do it, what the benefits are and what to look out for.
Do you need a personal loan?
Before taking out a personal loan, you should consider if a loan is the best option for you and your needs. Personal loans are a reliable and convenient financial tool when used properly. You should think about how you will pay the lending rate back, as being late with your loan repayments can have serious implications on your financial health and credit score, which can compromise your ability to secure financing in the future if you wish to do so.
Although personal loans are great, you should look at alternative options before deciding the best option for you during increased inflation rates. This includes looking at your personal savings, secured loans, and using a credit card or personal lines of credit.
What’s the difference between inflation rate and lending rate?
The inflation rate is the increase of prices over a period of time. It is typically used in broad circumstances, such as the increase of overall prices or the rise in the cost of living in a country, but inflation can also be specific for certain goods, such as the inflation of avocados or almonds. In any context, inflation represents how much more expensive an item or price has become over time.
On the other hand, loan rates represent the cost of borrowing money. It involves lenders and borrowers. Lenders, such as banks and financial institutions, determine which interest rates to attach for their borrowers, or customers, based on a series of conditions, such as their creditworthiness, type of loan taken and the overall economic condition, such as inflation.
What impact does inflation have on loan rates?
Although inflation doesn’t directly impact fixed interest rates, it’s a trickle-down effect, and the two are correlated. This is because inflation is the primary tool used by central banks to manage inflation. If inflation is too high, governments might raise interest rates to discourage borrowing and encourage saving. Conversely, if the economy needs a boost, the government will lower interest rates, so individuals are more willing to borrow money to have more money to spend.
What is the cost of inflation on personal loans?
Personal loans generally have fixed interest rates, which means that the interest you pay doesn’t change for the duration of the loan. If you have a personal loan taken out before inflation, inflation will not change your interest rates as it is at a fixed rate. However, if you are a new borrower taking out cash during inflation, lending rates are likely to increase, and you may end up paying more interest.
How do inflation rates benefit borrowers?
A basic rule of inflation is that the value of cash declines over time, and the saying goes that cash now is worth more than cash in the future. So, if you are a borrower, inflation increases let you pay lenders back with money worth less than when you originally borrowed it.
Should you take out a personal loan during an inflation increase?
Ultimately, this will depend on your needs. When inflation occurs, products, groceries and living necessities may be more expensive than your budget allows. In this case, taking out a personal loan can ease your cash flow problems and help you cover any unexpected expenses that arise. The chances are that your finances will begin to recover again, and you will be able to repay the personal loan, but it’s important to consider how long that will be.
In most cases, the inflation rate is correctly incorporated into the loan cost as lending is usually at a fixed rate. Other factors that go into determining the personal loan cost are your credit score and repayment capacity. If you have a good repayment capacity, banks consider you a low-risk party and will charge a low-interest rate. Contrary, if your credit score is excellent, the interest rate will be high. In some cases, people with very low credit scores and poor repayment capacity get their applications for personal loans rejected. So, these circumstances have been accounted for when you look for a personal loan.
You should always think about what you need the loan for, if you are able to repay and alternative options before getting a personal loan.
Compare personal loan options on Lendela
If you are set on getting a personal loan, let Lendela help you find the best option. Not only is the application process quick, convenient and online, Lendela also ensures that you get different offers so that you can see and pick the best option for you, especially regarding the loan rates.
Lendela introduces you to banks and financial institutions that are 100% transparent about all their fees, conditions and terms so that you know every detail of your loan and that you can select the right offer to proceed with. If you have any questions, let us know and our experienced team will help you with more information about the costs of inflation.