How inflation affects loan repayment? Key insights you need to know | Mint

Loan repayment is one of the many aspects affected by inflation. It affects purchasing power of money, interest rates and overall cost of borrowing. For borrowers, inflation can have both positive and negative consequences, depending on factors such as the type of loan, interest rate structure, and economic conditions.

Understanding inflation and loan repayment

Inflation is the increase in price of goods and services over time thus decreasing the buying power of money. Monetary policies of the Reserve Bank of India are used to control inflation by changing interest rates. Hence, these adjustments affect loan repayment for borrowers.

As inflation rises, interest rates of banks and NBFCs also rise, as a result, increasing the cost of borrowing. This way, it becomes more expensive to take new loans or refinance existing loans for individuals.

How does inflation affect loan repayment?

Higher interest rates on new loans:RBI tends to raise benchmark interest rates to control high inflation. Thus, banks and NBFCs increase their lending rates and the cost of new loans become higher.

Increased EMI for floating rate loans: Inflation can increase your loan EMI if you have chosen a floating interest rate. This is because the floating rate on your loan will be directly impacted and will increase substantially which will ultimately result in a higher EMI.

Difficulty in budget management:The rising inflation will have an impact on your overall budget due to an increase in cost of essential goods and services. This may make it harder for you to allocate funds for your loan repayments and increase financial burden.

Tips to manage loan repayments amidst inflation

Increase loan tenure:Increasing loan tenure means that your monthly EMIs will decrease and it will be easier on your finances. Nevertheless, it will increase the period to pay back your loan. Your credit score can get you better loan terms.

Prepay your loan:Making partial payments reduces your balance which will consequently decrease interest costs. But before you decide to prepay your loan, make sure to look for prepayment fees and charges.

Loan balance transfer:You can also look at interest rates given by other lenders to have better repayment terms. However, you should decide whether or not paying the balance transfer fee is better than the increased interest rate. You may also negotiate with your current lender to alter your loan terms.

Finally, inflation can affect your repayment on the loan and may result in you having more financial burden. In this case, you must ensure that the loan you are planning to borrow is done after you plan your repayment journey and keep emergency funds for the future. Therefore, you need to borrow the amount that can be repaid easily as per your budget.

(Note: Raising a loan comes with its own risks. So, due caution is advised)