Another component of our personal finance, where inflation leaves an impact is interest rates of personal loans. These interest rates fluctuate over time due to inflation and for the profit margin of the lenders along with maintaining purchasing power. Let us examine how personal loan interest rates are influenced by inflation and how to manage those variations.
Understanding personal loans
Personal loans are unsecured loans that do not require the use of collateral and allow individuals to borrow a specific amount of money. Personal loans can be spent on various things, which include emergency costs, consolidation of debts, and home improvement. Personal loans are flexible financing options because the borrower has to pay them back with fixed payments over a set period.
What is inflation?
Inflation refers to a general increase in the cost of goods and services over time. As inflation grows, money loses purchasing power, so one buys less with the same amount of money. The different causes of inflation include a change in monetary policy and some supply shortages and rising demand.
How inflation influences personal loan interest rates?
Another important determinant of personal loan interest rates is the repo rate, or the rate at which commercial banks borrow from the Reserve Bank of India (RBI). The repo rate and personal loan interest rates are quite strongly correlated. When the repo rate goes up, borrowing becomes more expensive for banks, leading to higher consumer interest rates personal loans are no exception.
Ashish Tiwari, Chief Marketing Officer, Home Credit India, expressed that, “Personal loan interest rates are closely tied to inflation levels in the economy. When inflation rises, the Reserve Bank of India (RBI) increases key interest rates to curb spending and borrowing, which in turn has potential to make personal loans like any other loan type more expensive. Conversely, during periods of low inflation, the RBI lowers interest rates to stimulate spending and borrowing, paving the way for personal loans more affordable.”
A decrease in the repo rate may stimulate lenders to lower their interest rates too, thereby reducing costs for borrowing for the customers. For instance, several lenders increased their interest rates on personal loans by 0.5% to 2.5% after the repo rates suddenly shot up early this year.
In conclusion, direct influence on personal loan interest rates is exerted by inflation, and also the one which influences costs of borrowing, EMIs, and total cost of credit. You’ll make better decisions and handle your debt much better if you know how inflation and interest rates are interrelated.
(Note: Raising a personal loan has its own risks)
