In the past few years, inflation has been a buzzword thrown around when discussing the cost of things in your budget. And rightly so, inflation has soared to historic levels recently, at one point more than four times the typical benchmark. Everything from groceries to gas is more expensive as a result.
In all this financial turmoil, it’s easy to overlook how inflation can also affect loans and lines of credit. But as a borrower, it’s important you understand this economic factor. In this guide, you’ll find a quick overview of what happens to credit when inflation is high.
Invariable Rates Will Fluctuate
The central bank generally increases interest rates on loans and lines of credit as a way to control runaway inflation. Higher interest rates discourage people from borrowing, which — in theory — reduces how much people can spend.
Whether this rate hike applies to your current outstanding loans depends on your loan agreement. Some lenders provide variable interest rates, which means the interest that applies to your account depends on the market. If the central bank raises the overnight rate, your rate will go up. Conversely, your rate can go down if the central bank lowers the overnight rate.
An online financial institution such as MoneyKey does not apply variable rates. Instead, their online loans and lines of credit have fixed interest rates. This means the rate will remain the same for the duration of its lifespan. Whatever you qualify for at the beginning stages of your application will go unchanged until you repay what you owe.
With a fixed interest rate, your installment loan payments will be the same for the entire term. If you have a line of credit, your balance can vary depending on the draws you make against this account. However, the interest that applies to your outstanding balance won’t change. These fixed interest rate rules apply to any loan that has a fixed rate, even if you don’t borrow from MoneyKey.
Future Personal Loans May Be More Expensive
Let’s say you don’t have a loan right now, but something happens tomorrow.
Maybe your dog falls mysteriously ill on holiday, and you have to visit an out-of-state emergency clinic for treatment. Or perhaps your child falls off the jungle gym and needs a cast on their wrist.
If you don’t have savings to cover these expenses, you might take out an online line of credit for help.
Depending on when you take out a new loan, the rate hike could affect the interest and finance charges applied to your future account. That’s because most of the biggest banks adjust their prime borrowing rate to adequately reflect the benchmark set by the central bank.
You could see this adjustment reflect in the options available to you, even if you don’t qualify as a prime borrower. It depends on how your lender establishes its rates.
Since there’s a chance a loan could cost you more while the rate hike is in effect, financial advisors recommend you put off borrowing as long as you can.
How can you do that? By focusing on savings.
You need a strong emergency fund that you can rely on for extra cash, not loans. Sit down with your budget to see what spending you can cut. Anything you can live without can start your savings — even just $25 a month adds up.
Bottom Line:
Inflation affects more than just the cost of groceries, clothing, and tech. It can also have a profound impact on your borrowing experience.
