The effects of inflation have a wide-ranging impact on the economy. The relentless rise in the price of goods and services raises the cost of living, making it more difficult for individuals to meet their financial obligations. And of course, borrowers are not exempt and are even more vulnerable compared to others for a wide variety of reasons.
If you are one, here are the reasons why inflation is a serious problem for you and what can be done to minimise its negative effects.
Decreased buying power
One of the most significant factors in inflation is the loss of purchasing power for consumers. As the value of money declines, so does income. This scenario is difficult for everyone who earns just a little more than enough and below. This is especially true for borrowers, as they already allocate a portion of their income to loan repayments.
Consumers who fall under any of those circumstances should keep track of prices. This way, they can change their shopping habits accordingly and get more value out of their money.
Difficulty in repaying the loan
Some borrowers will find it hard to manage monthly loan repayments because they are already overwhelmed by the rising costs of daily needs such as groceries, transport, and utilities. This can cause missed or delayed loan payments. Avoid this as much as possible, because missed or delayed repayments incur penalty fees.
Higher interest rates
To control the decrease in purchasing power, or inflation, central banks and money lenders raise the interest rates on loans to commercial banks. The two then pass on the higher rates to their customers. Basically, when interest rates are high, the cost of borrowing money rises: you pay higher interest rates on new loans.
The impact on your existing loans could vary depending on whether you have a fixed- or variable-rate loan. Fixed-rate loans are unaffected by rate changes, but borrowers with variable-rate loans may experience considerable increases in their payment amounts.
Debts become expensive in the long term
While inflation continues for certain periods of time, debt will not adjust. For example, a borrower has a fixed-rate personal loan from one of the best licensed money lender Singapore. Having the same monthly payment is not an indication that the amount he/she has will be adjusted to the new value when inflation happens.
Why? Because, even if the monthly payment stays unchanged, the real value of that payment rises as the income she/he receives each month struggles to keep up with inflation. This could result in borrowers finding it more difficult to manage loan repayments, since the money used to pay down the debt has lost value, even though it has not changed on paper.
Conclusion
Inflation is disastrous for any country’s economic prosperity. A number of sectors will be negatively impacted, including borrowers. The loss of purchasing power, as well as the higher interest rates that borrowers must pay, make debts more expensive in the long run, presenting an imminent threat to inflation.
Hopefully, after reading why inflation is a serious problem, we hope that you, a borrower, will be more proactive in managing their loans and agile in adapting whenever inflation is on the rise.