Personal Loans » Advice » Should I Get Personal Loan When Inflation Is High?
Advertiser Disclosure

This website is an independent, advertising-supported comparison service. The product offers that appear on this site are from companies from which this website receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This website does not include all card companies or all card offers available in the marketplace. This website may use other proprietary factors to impact card offer listings on the website such as consumer selection or the likelihood of the applicant’s credit approval.

This allows us to maintain a full-time, editorial staff and work with finance experts you know and trust. The compensation we receive from advertisers does not influence the recommendations or advice our editorial team provides in our articles or otherwise impacts any of the editorial content on The Smart Investor. While we work hard to provide accurate and up to date information that we think you will find relevant, The Smart Investor does not and cannot guarantee that any information provided is complete and makes no representations or warranties in connection thereto, nor to the accuracy or applicability thereof.

Learn more about how we review products and read our advertiser disclosure for how we make money. All products are presented without warranty.

Should I Get Personal Loan When Inflation Is High?

Inflation can also have a number of different effects on borrowers. These include higher borrowing costs, difficulty in obtaining credit and more
Author: Lorraine Smithills
Lorraine Smithills

Writer, Contributor

Experience

Lorraine is a freelance finance writer with years of experience in the banking sector and after a successful career in one of the largest retail and commercial financial services providers. She has a passion for helping people with less financial confidence to get control of their money through budgeting, saving, and responsible credit practices.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.
Author: Lorraine Smithills
Lorraine Smithills

Writer, Contributor

Experience

Lorraine is a freelance finance writer with years of experience in the banking sector and after a successful career in one of the largest retail and commercial financial services providers. She has a passion for helping people with less financial confidence to get control of their money through budgeting, saving, and responsible credit practices.

Review & Fact Check: Baruch Mann (Silvermann)

Baruch Mann (Silvermann)

Financial Expert, The Smart Investor CEO

Experience

Baruch Mann (Silvermann) is a financial expert and founder of The Smart Investor. Above all, he is passionate about teaching people how to manage their money and helping millions on their journey to a better financial future.

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Transparency is a core value for us, see how we make money.

Table of Content

How Does High Inflation Impact the Lending Market?

As a response to higher rates of inflation, interest rates are increased. This means that variable rates across all lending products will all increase. So, if you have a variable rate loan, or mortgage, or a credit card, you are likely to receive a notification from your lender that your rate is set to increase.

However, there are other impacts of high inflation within the lending market. Although rate increases can provide lenders with a bigger margin, lenders tend to be a little more hesitant. When there is more financial pressure for consumers, the number of financial issues also tends to increase. There are likely to be more defaults and bankruptcy filings. This means that lenders will brace for needing to write off more debt.

As a result, lenders will typically have more restrictive lending criteria. While you may have qualified with an average credit score for a specific lending product last year, this year you may not get approved.

How Inflation Affects Lenders

The effects of inflation for lenders includes:

  • Higher Margins: Since lenders can increase their rates in line with the base rate increase, they can enjoy a higher margin without becoming uncompetitive.
  • Greater Risk: As the cost of living increases, there is a greater risk that customers will default on their debt. This means that lenders may need to adjust their lending criteria to mitigate the increased risk.
  • Increased Write Offs: When inflation is high, there is more financial strain on households and businesses, which increases the number of bankruptcies. This means that lenders need to be prepared for an increased number of write offs, which can compromise profits.

How Inflation Affects Borrowers

Inflation can also have a number of different effects on borrowers. These include:

  • Higher Borrowing Costs: With higher lending rates, borrowers need to be prepared for higher borrowing costs. Even a 1% increase on the rate on personal loans and credit cards can have a significant impact on the overall cost of the debt.
  • Greater Difficulty in Obtaining Credit: Since higher inflation tends to make lenders more hesitant to lend, borrowers may experience greater difficulty in obtaining credit. While in the past, you may have had no problems qualifying for a lending product, now it may be a little trickier.
  • Less Leniency: As the lender experiences more defaults and higher write off figures, you may find your lender less lenient to your financial circumstances. Previously, you may have been able to negotiate a refund of a late fee, if you had a bank delay that meant your payment landed a day or two late, now you may be forced to pay the fee.
  • Fewer Promotions: In times of low inflation, lenders may want to encourage more business with promotional rates and offers. However, the reverse tends to be true when the rate of inflation is high. So, if you’re shopping for a new lending product, don’t expect to see lots of promotions and offers.

Is It Harder to Get a Personal Loan Now?

As we touched on earlier, lenders tend to be a little more hesitant about lending during high inflation periods. This means that it tends to be harder to qualify for a personal loan.

We’re currently experiencing the highest inflation rate since the early 1980s, so many consumers have started to have difficulties obtaining personal loans. Lenders may need to see more supporting paperwork and may need you to demonstrate a more solid credit report.

You may find that with an average credit score, you have fewer personal loan opportunities and experience offers with higher rates.

However, if you have a good credit score with a low credit utilization ratio and debt to income ratio, you shouldn’t have a problem obtaining a personal loan. This is particularly true if you work with a lender who you already have an existing relationship with. When you have a checking account in good standing with your bank, they may be more inclined to approve your personal loan application.

Compare Personal Loan With Our Partners

Credible

  • Get a personalized rate quickly
  • Variety of lenders
  • Best rate guarantee (terms apply)

Bankrate

  • Get prequalified loan offers
  • 2 minutes or less
  • NOT affect your credit score

Personalloans.com

  • $1,000 to $35,000
  • Get funding fast
  • No hidden fees

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

Best Rate Guarantee – $200 giftcard if you find and close with a better rate elsewhere (terms apply)

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

How Inflation Impacts the Economy

Inflation impacts the economy in a number of different ways.

  • Decreased Purchasing Power: The most obvious impact of inflation is that you’ll have decreased purchasing power. This means that you’ll be able to buy less for your dollars. For example, you may have been able to buy a loaf of bread for $1 two years ago, but now it costs $2 for the same loaf. While you may notice the increased price of everyday items, this decreased purchasing power also affects businesses that will need to pay more for raw materials.
  • Increased Interest Rates: Governments aim to keep inflation in check and one of the tools to accomplish this is altering the base interest rate. When inflation is on the increase, the FED will increase the base rate, which drives up interest rates across the financial sector.
  • Promotes a Short Term Growth: A high rate of inflation triggers a temporary spurt of quick economic growth. Since purchasing power is reduced and consumers are wary of tying their funds up in savings, they tend to spend money now. For example, when prices are on an upward trend, consumers may be tempted to buy items that they have been thinking about. This creates short term economic growth.
  • Triggers a Recession: Although there can be short term economic growth, high inflation often leads to a recession. With higher interest rates, price hikes, and higher production costs, unemployment also starts to increase, which can trigger a recession.
  • Inflation Feeds on Itself: Although a little inflation is essential for a healthy economy, when there is a sharp increase, there are expectations of high future rates of inflation. This creates a self fulfilling prophecy, as workers begin to demand higher wages to compensate for the higher cost of living, companies need to pass on these increased costs by raising their prices. If left unchecked, high inflation can lead to hyperinflation where you would need hundreds of dollars to buy very simple, basic items.

How Does Inflation Affect Personal Loan Interest Rates?

Inflation and interest rates have a strong relationship. So, when inflation increases, interest rates typically follow. This means that you can expect to pay higher interest rates on newer loans.

With the base rate being higher, most banks will adjust their rates. Additionally, all banks and financial institutions set your specific rate according to your risk profile. Since banks tend to be more risk averse during high inflation periods, unless you have perfect credit, you may struggle to obtain the advertised personal loan rate.

However, if you already have a personal loan with a fixed rate, inflation will have no impact on your loan. This is because you have already locked in your rate when you took out the loan. So, your loan agreement would have included a payment schedule for each month over the loan term.

This is excellent for budgeting as you know exactly how much you need to pay and with higher inflation rates, you can actually get greater value from your loan.

Video You May Like

Can the Lender Raise My Rate in the Future?

This will depend entirely on whether your personal loan has a fixed or variable rate. Many lenders offer personal loans with a fixed rate, which allows you to lock in your rate when you accept the loan terms. This will be set for the entire lifespan of your loan.

However, if your loan has a variable rate, it means that the lender may raise your rate at any point in the future. The lender will need to provide written notice of your rate increase and the date from which the higher rate will apply.

This means that if you are concerned about lenders raising your rate in future, it may be a good idea to look for a fixed rate personal loan. Just be aware that if inflation starts to wane and interest rates start to drop, you won’t benefit from a lower rate.

How Much is a 1% Interest Rate Increase on a $50k Loan?

While 1% may seem insignificant, a 1% interest rate increase can have a significant impact on your $50k loan.

If you have a $50,000 loan with a 10 year term, an increase of 1% can impact your monthly repayments and the overall repayment amount for the loan. For example, if the rate was 4%, your monthly repayment would be $504, with a total repayable interest over the 10 year of $10,543.

If the rate then increases to 5%, the monthly repayment goes up to $527, with a total repayable interest amount of $13,314. This means that the 1% rate increase would cost you an additional $2,800 over the loan term.

The impact of a 1% rate increase becomes even more apparent when the initial rate is higher. If the same $50,000 loan had a 9% rate, the monthly repayment would be $623 and the total interest $24,869. When the rate goes up to 10%, the monthly payment goes up to $648 and the total repayable interest is now $27,865.

So, as you can see, even a modest 1% interest rate increase can have a significant impact on the amount you need to repay.

Main Risks for Borrowers When Inflation is High

There are a number of risks for borrowers when inflation rates are high. These include:

  • Higher Borrowing Costs: With higher interest rates, the cost of borrowing will be more. This means that borrowers will need to assess whether paying a higher rate is the best option or if it would be better to consider other alternatives to pay for their planned purchase.
  • Locking in Rates Can be Positive or Negative: If you lock in a fixed rate loan when inflation is high, it could be a positive or a negative. While you would be protected against rising monthly repayments if the rates go up, if the rates start to fall, your rate would stay the same. So, you will need to think carefully if a fixed rate is a good option.
  • Variable Rates Can Increase: If you don’t like the idea of getting stuck with a higher rate, you need to be prepared for variable loan rates to increase. When inflation rates are volatile, it can make it difficult to budget for your loan repayments, as the payment amounts could change from month to month.

Things to Watch For When Taking Out a Personal Loan

If you’ve decided that you want to take out a personal loan during this period of high inflation, there are some things you should watch out for.

Fees and Charges: The first thing you need to assess is any fees or charges that could be applied to your account. Some lenders impose an arrangement fee on personal loans, which means you’ll need to pay a set amount or percentage before you receive the proceeds of your loan.

  • Early Repayment Penalties: You also need to check the terms and conditions to see if there are any early repayment penalties. If you can find a better loan deal and want to move your loan to a new arrangement, you don’t want to get stung with a penalty.
  • Monthly Repayment Amount and Term: The loan term will have a direct impact on how much you’ll need to repay each month. While it is important to have a monthly repayment that you can comfortably afford, the longer the term, the more the loan will cost you overall. So, you’ll need to find a good balance between affordability and cost.
  • Funding Period: If you are planning a purchase or want to reorganize your credit card debt, the funding period for your loan may be a crucial factor. If you’re paying a higher interest rate on your credit card debt, the quicker you can get your new loan funded, the less interest you’ll incur. However, if you have no timeframe set for your purchase, you may be prepared to wait for a loan that offers more attractive terms, but takes longer to fund.

Best Tips for Borrowers in High Inflation Times

Before you agree on a loan during times of high inflation, there are some tips that can help you.

  • Be sure to shop around: While the market may not be as filled with great deals and offers, it is still important to shop around to find the best personal loan rates. Don’t simply opt for the first loan deal you see. You may be surprised at what competing lenders can offer you.
  • Leverage your existing financial relationships: If you already have established relationships with a bank or financial institution, you may be able to leverage this to get a great personal loan deal. Your bank may have more flexible lending criteria, as you have already demonstrated that you can handle your financial responsibilities.
  • Evaluate alternatives: Although you may assume that a personal loan is the best option for you, it is still worth evaluating if there are financial alternatives that could be better suited to your needs and preferences. For example, if you are planning a purchase and could repay it over the short term, a credit card with a 0% promo rate for six months may be a better choice. However, if you are planning on borrowing a larger sum, you may be able to get a more attractive rate if you opt for a home loan or secured line of credit.
  • Double check the terms and conditions: Finally, before you agree on your loan, double check the loan terms and conditions. Although reading through a lot of financial jargon can be daunting, the terms and conditions will detail any fees or charges that could be applied to your account, the monthly repayment, and how much you will pay over the lifetime of the loan. When you’ve checked the terms, you can sign your loan agreement with complete confidence.

Compare Personal Loan With Our Partners

Credible

  • Get a personalized rate quickly
  • Variety of lenders
  • Best rate guarantee (terms apply)

Bankrate

  • Get prequalified loan offers
  • 2 minutes or less
  • NOT affect your credit score

Personalloans.com

  • $1,000 to $35,000
  • Get funding fast
  • No hidden fees

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

Get prequalified loan offers in 2 minutes or less. This will NOT affect your credit score

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

FAQ

An interest charge is associated with a personal loan, just like it is with a mortgage, home equity loan, or even a credit card. You must also pay a portion of the loan amount in addition to the loan balance. Therefore, at the end of the year, if you have a personal loan of $10,000 with a rate of 7% and a duration of one year, you will have to pay back $10,700.
If the loan term is more than one year, you will pay that percentage on the outstanding loan balance each year because the interest rate is expressed as an annual percentage rate.

There are a number of alternatives to a personal loan. If you need some funds in the short term, there are low interest credit cards or cards with an introductory rate. If you want to access lower interest rates, a better option could be a secured loan or home equity loan.

The best product for you will depend on your needs and circumstances. It is always a good idea to check the terms and conditions and verify the total amount you can expect to pay. This will allow you to make an accurate comparison to determine the best choice for you.

You can shop around the different lenders to see which one will give you the most favorable terms and interest rate. This can be done online by going through each of the reputable lenders and seeing what they have to offer.

There are often useful online comparison tools and calculators that can help you come to a smart conclusion as to what option is going to be the best for you.

The main thing to look for in a loan is that it has a low-interest rate. You also want to make sure the minimum payment they give you each month is something you can afford.

Some loans have longer repayment terms than others, so you might have a smaller monthly payment over a longer amount of time. If you have a longer repayment term though, you will be paying more interest as time goes by.

When you take out a personal loan, your debt-to-income ratio can rise, which will lower your credit score a few points. If we don't make the required monthly payments on time or if we entirely default on the loan, a personal loan may also have a negative impact on our credit score.

Make sure you can afford the monthly payments and that it won't be a problem for you each month before you take out a loan.

Suggested Video From Our Channel

Lorraine Smithills

Lorraine Smithills

Lorraine is a freelance finance writer with years of experience in the banking sector and after a successful career in one of the largest retail and commercial financial services providers. She has a passion for helping people with less financial confidence to get control of their money through budgeting, saving, and responsible credit practices.
Compare Personal Loans

Best Rate Guarantee – $200 giftcard if you find and close with a better rate elsewhere (terms apply)

Advertiser Disclosure

The product offers that appear on this site are from companies from which this website receives compensation. 

Table of Contents