Inflation can have direct and indirect impacts on your personal loans. Find out more about inflation below, including how it might impact any personal loans you already have or loans you want to take out in the future.
What Is Inflation?
Inflation refers to rising prices. To count as inflation, the increase in prices must be across the entire economy or nation and result in decreased purchasing power.
That doesn’t necessarily mean that every price goes up. You can have inflation that increases the price of many goods while some prices remain the same or drop. But you don’t have inflation when only the price of a single item or type of item goes up. For example, if meat prices go up, but the prices of most other consumer goods stay the same or go down, that’s not inflation. The rising meat prices are more likely the result of factors burdening the specific industry, such as processing plant failures or disease among cows.
The term inflation refers specifically to the rate at which prices are going up. Economic analysts and others look at prices of selected groups of goods to understand whether inflation is present and what the rate is. One of the most common tools used to track inflation is the Consumer Price Index. This index tracks the price of goods and services in eight categories:
- Medical care
- Other goods and services
Inflation’s Effect on Interest Rates
While high inflation and the rising cost of goods can be bad for an individual’s wallet, it’s often a symptom of economic growth. That’s because inflation often occurs when demand is bigger than supply. Demand often grows quickly when the economy is growing, and people have the money to spend on goods and services.
However, inflation rates that rise too high too quickly can put a strain on a growing economy and cause problems for individuals and businesses. Because of this, the Federal Reserve often seeks to control inflation with changes to interest rates. If interest rates are higher, it slows down how much people are buying and can help stabilize economic growth and inflation.
When inflation rates are going up too fast or getting too high, the Federal Reserve raises the interest rate that banks can charge each other for loans. Banks usually use this as a guide to set their own interest rates. So, if the Fed raises the federal funds rate, rates go up for mortgages, auto loans and other credit types.
The takeaway here is that rising inflation typically leads to higher interest rates, though there can be exceptions.
Inflation’s Effect on Prices
Rising inflation means increasing prices across a wide variety of goods and services. Increasing prices create decreased buying power. That means that for every dollar you have, you can buy less with it than you could have prior to inflation going up. That’s true for all items, including luxuries and basic necessities.
So, someone who wants to buy a yacht or splurge on a resort vacation would have to spend more to get what they want compared to the cost at lower inflation. The same is true for basic needs like groceries, too, which means you get less bread, milk and eggs for your money. Inflation is an economic equalizer; everyone has to deal with it regardless of their income or lifestyle.
Can Inflation Impact Your Existing Personal Loans?
Almost all personal installment loans are fixed-rate loans. That means you agree to an interest rate at the outset of the loan and it doesn’t change over the terms of the loan. Increasing inflation leading to increasing interest rates would not impact the interest you have on an existing personal loan.
That doesn’t mean inflation is completely irrelevant to any loan you might have. Rising inflation means a rising cost of living. When more of your paycheck or other income has to go toward the cost of living — such as paying for groceries, transportation and medical care — you have less to pay back debts. That can make it harder to make your loan payments and increases the risk of a missed loan payment even if your interest and payment amounts don’t change.
One of the best ways to avoid this type of issue when inflation occurs is to have an emergency fund saved up. You can use those savings to help cover the extra cost of living while inflation is high and still pay off your debts.
How Does Inflation Impact New Personal Loans?
If you take out new loans after rising inflation, you may be facing higher interest rates than you would have before. That increases the overall cost of your loan as well as the monthly payment you need to make. Pair that higher cost and payment with the fact that everything may cost you more, and it can make a new loan a bigger burden on your budget.
On top of that, since inflation increases prices, it may mean whatever you need the loan for in the first place costs more than it previously did. That could also lead to higher costs and loan payments. All the while, if your interest rate is higher, a larger part of each monthly payment goes to cover interest rather than paying down the principal you borrowed.
How to Get an Affordable Personal Loan
Basic economics won’t change just because you need a loan while inflation and interest rates are rising. But there are some things you can do to help ensure you get a more affordable personal loan. Here are some steps and tips to consider:
- Start by checking your credit. Your credit score and history play roles in whether you can get approved for a personal loan and at what interest rate. Knowing what your credit score is helps you know where you stand so you know what loans you can apply for, especially during times of rising inflation.
- Dispute any inaccuracies on your report. If you find incorrect information on your report, dispute it with the credit bureau in question. The credit bureau has a legal obligation to investigate potentially inaccurate information and make changes to your credit report to remove or fix information that’s found to be incorrect. If someone has reported a late payment that was on time or a balance on one of your accounts is listed incorrectly, this can drive your credit score down — and your potential interest rates up. Getting those issues fixed can help you get better loan terms.
- Pay off some of your other debts if possible. Reducing how much you have in credit card debt can help increase your credit score. A better score can mean better loan terms and reduced interest expense.
- Apply for a loan with a cosigner. If you don’t have the credit to secure the lowest possible interest rates, a cosigner might be able to help. A cosigner is someone with good credit who is willing to cosign your loan, agreeing that they will make the payments if you don’t. While this tactic does require you to find someone willing to take on that risk who also has good credit, it can result in a much lower interest rate.
- Get a secured loan. A secured loan is one that is backed by collateral. That’s something of value that the lender can take and sell to recoup any losses if you don’t make payments as agreed. Lenders see these loans as less risky because there’s a way to get the money back if you can’t pay the loan. Common collateral includes vehicles, boats, jewelry and other items of value. This can help you secure better loan terms, but it’s important to know that you could lose the collateral if you don’t make your payments as agreed.
- Apply for a lower loan amount or a shorter term. A lower loan amount means less risk for the lender, which can result in a higher interest rate for you. The same is true for a shorter term — if you agree to pay back a loan in less time, the lender has less risk over time.
Of course, the best way to get an affordable personal loan is to start with the right lender. Do your research to understand rates and terms and how each lender will work with you.
Secure a Personal Loan With No Hidden Fees From Wise Loan
You don’t need great credit to get a loan with Wise Loan. As a responsible lender, Wise Loan offers personal loans to help you get the money you need, even when the cost of living is increasing. Wise Loan’s rates and terms are stated clearly and don’t change after the loan is issued. There aren’t any hidden fees, and we report to all three credit bureaus to provide you with an opportunity to build your credit even more as you pay back 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.