Inflation can exert both direct and indirect influences on your personal loans. Gain a deeper understanding of inflation and its potential ramifications on your existing personal loans or any future loans you intend to pursue. Delve into the details below to learn more about this significant economic factor.
What Is Inflation?
Inflation denotes a general increase in prices across an entire economy or nation, resulting in diminished purchasing power. It’s important to note that not every price rise qualifies as inflation. Inflation occurs when prices of many goods experience an upward trend while some prices may remain stable or even decrease. Conversely, if only the price of a single item or specific type of item rises while most other consumer goods stay the same or decline, it does not qualify as inflation. Such price hikes in a particular industry, like meat prices due to processing plant failures or disease among cows, are typically attributed to industry-specific factors rather than inflation.
The term inflation specifically refers to the rate at which prices are increasing. Economic analysts and other observers assess the prices of selected groups of goods to determine the presence and rate of inflation. One commonly employed tool for tracking inflation is the Consumer Price Index (CPI). This index monitors the prices of goods and services in eight categories, including:
Inflation’s Effect on Interest Rates
While high inflation and the increasing cost of goods can have detrimental effects on individuals’ finances, they often serve as indicators of economic growth. This is because inflation tends to occur when demand outpaces supply. During periods of economic expansion, demand tends to surge as people have greater disposable income to allocate towards goods and services.
Nevertheless, excessively high and rapidly escalating inflation rates can strain a growing economy and create challenges for individuals and businesses. To address this, the Federal Reserve often implements changes to interest rates in an effort to control inflation. When interest rates are raised, it curbs consumer spending and contributes to stabilizing economic growth and inflation.
When inflation rates are escalating too rapidly or reaching excessive levels, the Federal Reserve responds by increasing the interest rate at which banks can lend to each other. Banks typically utilize this benchmark to determine their own interest rates. Consequently, if the Federal Reserve raises the federal funds rate, it leads to higher interest rates for mortgages, auto loans, and various other forms of credit.
The key takeaway is that rising inflation generally corresponds to higher interest rates, although there may be exceptions to this trend.
Inflation’s Effect on Prices
As inflation rises, prices across a wide range of goods and services increase, resulting in diminished purchasing power. This means that each dollar you possess can buy fewer goods and services compared to the period before inflation surged. This applies to both luxury items and essential necessities.
Consequently, individuals looking to purchase a yacht or indulge in a resort vacation would need to spend more to fulfill their desires compared to when inflation was lower. Similarly, basic necessities like groceries are affected, resulting in a decrease in the quantity of bread, milk, and eggs you can purchase with your money. Inflation serves as an economic equalizer, affecting everyone regardless of their income or lifestyle.
Can Inflation Impact Your Existing Personal Loans?
The majority of personal installment loans are characterized by fixed interest rates. This implies that when you initiate the loan, you agree upon an interest rate that remains unchanged throughout the loan’s duration. Therefore, increasing inflation leading to rising interest rates would not impact the interest rate of an existing personal loan.
However, it does not imply that inflation has no bearing on any loan you may have. Escalating inflation corresponds to an increased cost of living. As a result, a larger portion of your income, whether it be from your paycheck or other sources, must be allocated towards essential expenses like groceries, transportation, and medical care. Consequently, you have less available income to allocate towards debt repayment. This can potentially make it more challenging to meet your loan payments and elevate the risk of missing a payment, even if your interest rate and payment amounts remain unaltered.
One effective approach to mitigate such challenges during inflationary periods is to establish an emergency fund. By saving up, you can utilize these funds to offset the additional cost of living when inflation is high, while still managing to fulfill your debt obligations.
How Does Inflation Impact New Personal Loans?
Following a period of rising inflation, obtaining new loans may subject you to higher interest rates compared to what you would have encountered earlier. This results in an augmented overall cost of the loan and an increased monthly payment requirement. When combined with the fact that prices for various goods and services may have also escalated, a new loan can become a heavier burden on your budget.
Furthermore, as inflation drives up prices, the item or purpose for which you initially required the loan may now carry a higher cost compared to before. This can further contribute to elevated expenses and loan payments. Meanwhile, if your interest rate is higher, a greater portion of each monthly payment is allocated towards covering the interest rather than reducing the principal amount you borrowed.
How to Get an Affordable Personal Loan
Even in times of rising inflation and interest rates, the fundamental principles of basic economics remain unchanged when it comes to obtaining a loan. However, there are several steps and tips you can consider to increase the likelihood of securing a more affordable personal loan. Here are some recommendations:
- Begin by checking your credit: Understanding your credit score and history is crucial as they impact loan approval and interest rates. Being aware of your credit standing helps you identify suitable loan options, particularly during periods of inflationary pressure.
- Dispute any inaccuracies on your credit report: If you identify any incorrect information on your credit report, take steps to dispute it with the relevant credit bureau. They have a legal obligation to investigate potentially erroneous data and make the necessary corrections. Rectifying inaccuracies such as a misreported late payment or an incorrect balance can improve your credit score and potentially lead to better loan terms.
- Reduce existing debts if possible: Paying down credit card debt can positively impact your credit score. A higher score can result in better loan terms and reduced interest expenses.
- Consider applying for a loan with a cosigner: If your credit is not strong enough to secure the most favorable interest rates, having a cosigner with good credit may be beneficial. A cosigner is someone who agrees to assume responsibility for loan payments if you are unable to make them. While finding a willing cosigner with good credit carries some risk, it can potentially lead to a significantly lower interest rate.
- Explore secured loans: A secured loan is backed by collateral, which can be valuable assets such as vehicles, boats, or jewelry. Since lenders consider these loans less risky, they may offer better loan terms. However, it is important to note that failure to make payments as agreed could result in the loss of the collateral.
- Consider a lower loan amount or shorter term: Opting for a lower loan amount or a shorter repayment term reduces the lender’s risk and may result in a higher interest rate. By agreeing to repay the loan in a shorter timeframe, the lender bears less risk over time.
Of course, finding an affordable personal loan starts with selecting the right lender. Conduct thorough research to understand rates, terms, and how each lender works with borrowers to make an informed decision.
Secure a Personal Loan With No Hidden Fees From Wise Loan
Wise Loan understands that obtaining a loan may not require impeccable credit. As a responsible lender, Wise Loan is committed to offering personal loans to assist you in accessing the funds you require, even during periods of rising living costs. Our transparent approach ensures that our rates and terms are clearly stated and remain unchanged once the loan is granted. Rest assured, there are no hidden fees to worry about. Additionally, we report your repayment activity to all three credit bureaus, providing you with the opportunity to further enhance your credit profile as you successfully pay off your loan.
Find out more about Wise Loan’s products and apply for one today if it meets your needs.
The recommendations contained in this article are designed for informational purposes only. Wise Loan does not guarantee the accuracy of the information provided in this article; is not responsible for any errors, omissions, or misrepresentations; and is not responsible for the consequences of any decisions or actions taken as a result of the information provided above.