It’s natural to feel anxious, no one likes an economy in recession or high inflation. So, you might have put off taking that personal loan in Singapore until this whole thing blows over, right?
Well, the good news is that even as interest rates and inflation are at their peak, taking a loan might be a good idea. There are, however, some factors you need to consider before applying for a personal loan during high inflation.
Therefore, let’s further discover if it is a good idea to take a personal loan during a high inflation period.
What is Inflation?
Inflation is defined as a phenomenon when there is 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 the Goods & Services Inflation Calculator and the Wage Calculator provided by the Monetary Authority of Singapore.
How Does Inflation Affect Me?
You can’t ignore inflation. The rising cost of goods and services affects our lives in so many ways that it’s impossible to quantify all of them.
Cost of Living
The effects of inflation are felt by everyone. It affects not just the poor but even the rich. The cost of living will be higher for everyone because of inflation.
Property, healthcare, recreation, food and beverages and other forms of goods and services will evidently become more expensive due to the decreased value of money during an increasing inflation situation. Thus, you’ll have to fork out more for a specific good or service as the value of it has increased in comparison to the depreciated value of money.
Wages
Given the rising inflation, you’ll have to remind yourself to check your own wage trajectory and see if your salary can keep up with the inflation rate. Because, on a global scale, average salaries have been down by 3.8% in 2022 due to the ever-increasing inflation. Moreover, the wages of workers in Singapore, (calculated by nominal wage growth minus the rate of inflation), decreased by 1.7% in 2022 according to the latest Salary Trends Report by ECA International (ECA). This means that we’re effectively getting less pay taking into account the rising cost of everything, from basic necessities to luxury goods
Value of assets
As an investor, it is critical that you understand how your assets will be affected by inflation. Inflation is when the price of goods and services increases over time. It can occur when there is an increase in the money supply (which causes a decrease in purchasing power), or when there is an increase in the demand for goods and services (leading to higher prices).
If you own assets with fixed, long-term cash flows, be mentally prepared that they’ll perform poorly during rising inflation periods. Conversely, your assets which have adjustable cash flows such as property rental income, or commodities, will have more promising performance with rising inflation. So it’s wise to own a good mix of assets to avoid having low cash flow issues.
Loans Become More Expensive
If you have a floating (variable) rate loan, inflation can be a hassle because current loan interest rates are tied to rise in line with inflation, making the repayment of such loans more expensive. The fact that floating (variable) rate loans are becoming more expensive in inflation is also bad news for those looking to apply for a new one.
Inflation makes borrowing more expensive because it raises the cost of borrowing, aka 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, during a period of global inflation, such as now, interest rates on loans will rise in tandem with the US Federal Reserve’s interest rate hike, resulting in a higher cost of borrowing for individual borrowers seeking a loan.
How Does Inflation Affect Interest Rates?
Interest rates are one of the most important monetary policy tools used by central banks to manage inflation. When inflation rises, interest rates usually move along with it. This makes sense because higher inflation usually means higher prices for goods and services and therefore a lower purchasing power for consumers.
The relationship between inflation and interest rates is quite straightforward. Interest rates usually move according to the direction of inflation, as interest rates are among the key monetary policy tools used by many banks around the world to manage inflation.
So when rising inflation occurs, higher interest rates will be an expected policy response. On the other hand, when inflation decreases and economic growth slows down, lower interest rates may be introduced by banks to stimulate the economy.
Read Also: Effective Interest Rate (EIR) in Personal Loan in Singapore: What is It?
Does Inflation Affect Personal Loans?
For those who have taken on personal loans with somewhat fixed low-interest rates, inflation wouldn’t really affect them much, because as the value of cash erodes, you’ll just be making the same payments monthly or annually.
When compared to taking out floating (variable) rate loans, rising inflation won’t cut into the costs of paying back a personal loan as much. In fact, you’ll realise that your personal repayment costs will be relatively cheaper over time compared to floating (variable) rate loans.
As mentioned earlier, this is due to the fact that when rates are fixed and inflation rises, your repayments will not fluctuate as much as they would if you were taking out a variable-rate loan.
Should I Take A Personal Loan When Inflation Is High?
Many people take out personal loans during inflation to keep up with their financial commitments and expenses. But is it a good idea?
Let’s say you take out a new personal loan during the season of rising inflation. You’re actually paying back the bank with money that is worth less than it was before the inflation period because the value of cash is declining.
If you’ve already signed up for a personal loan with a bank before the inflation began, the inflation will benefit you even more as you technically have more money in your paycheck to pay off the debt while still owing the same amount of money.
So, be it for urgent medical expenses, more cash liquidity for your business or other reasons, getting a personal loan during inflation is one way to cope with specific situations that can either help you save some money in the long term or pay off emergency bills in the short term.
However, we should also take into account your current income, financial commitments and other related factors when being tied down to monthly repayments for personal loans.
How can Taking a Personal Loan Benefits You During High Inflation?
A personal loan can be an excellent tool for paying off debts and investing in one’s financial future all at the same time.
For instance, if you have a lot of debt from credit cards or school loans, getting a personal loan could assist improve your financial situation by allowing you to pay off those high-interest obligations with reduced monthly payments.
This would allow you to have a better handle on your finances. You will also have the opportunity to consolidate all of these loans into a single more manageable monthly payment so that they are less of a strain on your finances.
You should also give some thought to the possibility of employing a personal loan as a vehicle for your investments.
Moreover, taking up a personal loan during times of high inflation can work in your favour due to this reason: because your loan and repayment schedule and amounts remain unchanged due to the personal loan’s terms being a fixed-rate loan, money now has less value than it did when you first borrowed.
This means that personal loans become cheaper to take 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? Here’s What You Need to Consider
In the event that you are considering obtaining a personal loan, the following are some considerations to keep in mind:
- The interest rate on personal loans is greater than the interest rate on other types of debt such as credit cards and bank loans.
- The repayment terms on personal loans are more flexible, which means you can pay them off more rapidly than if you were using another sort of debt. This could come in handy if your financial status improves, or if there is a chance that interest rates will rise in the future (which would make paying off your loan more expensive), as both of these scenarios would make it more expensive for you to repay the loan.
- If you have a strong credit score, you have a better chance of being approved for larger loans and receiving cheaper interest rates than individuals who have a poor credit score. If your financial situation takes a turn for the worse and your credit score declines, lenders will be less likely to approve your application for a loan. This is the negative of having a lower credit score.
Read Also: How to Get a Personal Loan with Bad Credit: The Ultimate Guide
The Bottom Line
To sum things up, taking out personal loans during times of high inflation is not a bad idea. They can be an effective method to help you get out of debt or pay for unanticipated expenses.
Nevertheless, before you take out a loan of this kind, you ought to examine all of your available alternatives to ensure that you won’t wind up spending more money than is strictly necessary over the course of the loan’s term due to the interest rate or any other expenses.
