Taking Personal Loans When Inflation Is High: Always a Bad Move?

If you haven’t already heard, inflation rates are skyrocketing all over the world.

The Straits Times reported on June 16 that the United States Federal Reserve raised interest rates by “75 basis points” in response to the inflation surge caused by the war in Ukraine and global supply issues. This is the biggest hike since 1994, and has led to large increases in Singapore’s interest rates too.

Spiking interest rates and surging inflation may sound bad for the economy, but in reality, it’s not always all doom and gloom. In fact, there can be benefits in taking up a personal loan at this time.

What is inflation?

According to Investopedia, inflation is a phenomenon where the value of money declines, especially when weighed against “an increase in the average price level of [goods and services] in an economy over some period of time”.

Inflation is calculated by the inflation rate, which measures the annual percentage rate of change in the general price index of goods and services in an economy. If you’d like to experiment with how prices change as a result of inflation, we recommend using tools like this wage calculator and goods and services inflation calculator provided by the Monetary Authority of Singapore.

How does inflation affect me?

Inflation affects us in a variety of ways, some more obvious than others. Here are some examples:

Increases the cost of living

When there is inflation, goods and services become more expensive to buy because the value of money has decreased. When this occurs, you end up paying more in cash to be able to afford a specific good or service because its value has increased in comparison to the depreciated value of money. As a result, prices for goods and services will rise to reflect the decrease in the value of money due to inflation.

This creates a situation where the cost of goods and services and your overall cost of living rises.

Read more: 5 Lifestyle Habits to Help You Save Money

Overturns the value of your assets

Inflation can also overturn the value of your assets, and you might oscillate between feeling poorer or richer all of a sudden.

If your assets remain stagnant or grow at a rate slower than current inflation rates, they will depreciate and you will suffer a loss.

Let’s consider savings in your local bank as an example. According to the Monetary Authority of Singapore, average interest rates for savings accounts in banks have been less than 1% since 2001. Given that the average inflation rate in Singapore, as calculated by SmartWealth SG, was more than 1% in 2001, this means your savings will be worth less in 2021 than they were in 2001.

In contrast, you might be able to profit from inflation if you can get your assets to earn returns that are equal to or greater than the current rate of inflation.

Loans become more expensive

Another way inflation makes things more expensive is by raising the cost of borrowing. This refers to your loans.

The interest rates on loans (along with other monetary interest rate values) set by banks in Singapore are pegged to the US Federal Reserve rates, according to The Simple Sum. As a result, when there is global inflation (like now), interest rates on loans will rise in tandem with the US Federal Reserve’s interest rate hike, leading to a higher cost of borrowing for individuals seeking a loan.

If a borrower took out a loan with a floating (variable) interest rate, inflation can be a headache since loan interest rates will rise in line with inflation, making the repayment of such loans more expensive. The fact that floating (variable) rate loans become more expensive in inflation is also bad news for those looking to apply for a new one.

Some good news

Contrary to popular belief, periods of high inflation can actually be the best time to apply for a personal loan.

This is especially so in Singapore, because of the nature of personal loans here.

As previously mentioned, taking out floating (variable) rate loans usually costs the borrower money. In Singapore, however, personal loans are based on fixed interest rates. This means borrowers typically gain rather than lose money if they take out a personal loan during periods of high inflation and are able to use the loan as leverage.

Read more: 3 Effective Ways To Hedge Against Inflation

How can taking a personal loan benefit me?

Taking up a personal loan during times of high inflation can work in your favour. Because of the fixed rates, your loan and repayment schedule and amounts remain unchanged. Money now has less value than it did when you first borrowed. This means that personal loans cost less to take up, as you’ll end up paying back with money that is worth less now than it was when you borrowed it.

Interested in getting a personal loan?

Lendela partners with multiple banks and financial institutions that offer personal loans at a fixed rate. You can be confident that we will tailor and provide the best rates for you based on your individual situations, as we only send you offers based on your profile (completed with SingPass, or otherwise).

What makes using our platform even more attractive is that you’ll have multiple personal loan options to choose from before deciding which one will be the best one for you to leverage and benefit from.

Explore your multiple options at no cost with Lendela here.

This article was originally published on Lendela.

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