How Inflation Can Affect Your Loans and Finances

Inflation can be a confusing topic, but it’s something that affects all of us - especially if you have a loan or are thinking about getting one. According to Bankrate prices have gone up 21.4% since February 2020 (Visit the Bankrate Morgan Website). In this post, we’ll break down what inflation is, how it can impact your loans, and what you can do to protect yourself financially.

What is Inflation?
Inflation happens when the prices of goods and services go up over time. This means that the money in your pocket doesn’t stretch as far as it used to. For example, if a gallon of milk costs $3.00 today and inflation is 2%, it might cost $3.06 next year. That may not seem like a lot, but when you apply it to all your expenses - groceries, gas, rent, medical bills - it adds up quickly.
Inflation is measured as a percentage, and it affects everyone. When prices rise and your income stays the same, you have less buying power. This is why rising inflation can be concerning.

How Does Inflation Affect Loans?
If you have a loan, inflation may affect it in a few different ways. Here’s what you need to know:

• Inflation May Impact Interest Rates

Interest rates and inflation are closely linked. When inflation rises, the Federal Reserve (often called “the Fed”) may raise interest rates to keep inflation in check. This can affect both new and existing loans, if the existing loans do not have a fixed interest rate.

Fixed-Rate Loans: If you have a fixed-rate loan, your interest rate stays the same no matter what happens with inflation, but new fixed rate loans might have a higher interest rate during times of inflation.

Variable-Rate/Adjustable Rate Loans: However, if you have a loan with a variable interest rate, inflation may cause your payments to go up. That’s because your interest rate can change as the economy changes.

• Inflation Affects the Cost of Living

Inflation doesn’t just affect your loan; it can affect your entire budget. When prices for everyday items like food, gas, and utilities rise, it may become harder to keep up with all your bills, including your loan payments.
For example, if you have a monthly loan payment of $300, inflation can cause your rent, grocery bills, and other expenses to go up. That $300 payment might start to feel like a bigger burden because your other costs are rising too.

What Causes Inflation?
Inflation can happen for a variety of reasons. Here are a few common causes:

1. Demand-Pull Inflation: This happens when there’s a high demand for goods and services but not enough supply to meet it. For example, if everyone wants to buy Super Bowl tickets, but there are only a limited number available, the price of those tickets goes up because of the high demand.
2. Cost-Push Inflation: This occurs when it becomes more expensive to produce goods and services. If the cost of oil goes up, for instance, it becomes more expensive to transport goods, and companies may raise prices to cover those higher costs.
3. Government Policies: Sometimes, government actions, like distributing stimulus checks or lowering interest rates, can lead to inflation by increasing the amount of money in circulation. When there’s more money available, it can reduce the value of each dollar.

How Can You Manage Loans During Inflation?
Inflation can be tricky to navigate, but there are a few steps you can take to manage your loans effectively:

1. Stick to a Budget: Keeping track of your spending is important, especially if inflation is making things more expensive. A budget helps you prioritize your loan payments and other essential expenses so you can avoid falling behind.
2. Consider Refinancing: If you have an adjustable rate loan you might want to switch to a fixed rate so your payments are the same each month
3. Build an Emergency Fund: Having some money set aside for unexpected expenses is always a good idea, but it’s especially helpful during times of inflation. Even a small emergency fund can give you a cushion if inflation causes your expenses to rise.

Bottom Line: Inflation Affects More Than Just Prices
Inflation can make everyday life more expensive, but it can also affect your loans. Staying informed and managing your budget can help you stay on top of your finances during periods of inflation.