Highest inflation in years
The inflation rate in Germany has been at a high level compared to the previous year for several months. Consumer prices in July 2022 were 7.5 percent higher than in the same month last year. In June 2022, this value was even 7.6 percent and in May 2022 7.9 percent. Even if the federal government has tried to relieve the population in recent months with the help of tank discounts or the 9-euro ticket, inflation often leads to reduced purchasing power among consumers. Low-income households in particular are particularly affected.
This is how inflation affects existing loans
But how does inflation affect existing loans? In the event of inflation, money loses value, which means that loans are also devalued, as the press portal explains. Under certain circumstances, this can lead to the borrower benefiting from inflation. The situation is profitable for the borrower when the inflation rate exceeds the credit calculation. This inflation rate is an important indicator in the calculation of the real interest rate and the pricing of loans for financial institutions. Lenders then usually offer interest rates that are higher than the rate of inflation. However, rising inflation can in turn cause the real interest rate on installment loans to turn negative.
The real interest rate “is calculated from the average interest rate agreed with the bank, the nominal interest rate, and the current inflation rate. With a nominal interest rate of three percent and an inflation rate of 5.2 percent, the corresponding formula would result in a real interest rate of minus 2.09 percent “That means borrowers who are servicing an ongoing installment loan have to repay less money than they received. Or to put it another way: the loan debt is devalued by inflation,” explains the press portal using an example.
The situation is different with loans with variable interest rates. These are only fixed for a certain period of time and can be changed and adjusted by the lender at any time during the term of the loan. If inflation rises, the interest rate will also increase accordingly. It should also be borne in mind that borrowers only really benefit from inflation if their salaries are adjusted accordingly. Otherwise, the positive effect would be null and void, since the cost of living rises as inflation rises.
Is a new loan worth it during inflation?
However, the situation for consumers who take out a loan differs from those who already have an ongoing loan. The reason for this is that in times of high inflation rates, financial institutions will not grant a loan whose value could fall in the future due to inflation. On the contrary, lenders price the previously calculated inflation rate into their credit products. For borrowers, this means that inflation has a negative impact on a new loan, as it also increases lending rates.
According to a survey by the smava platform, a full 69.2 percent of the banks surveyed expect an increase (7.7 percent even with a very high increase) in interest rates for consumer loans. Only 23.1 percent of the banks surveyed assume that interest rates will remain constant.
In general, the loan term is the main thing to consider for new loans during inflation. “The longer the term, the higher the risk that the inflation rate will fall again and real interest rates will rise. We therefore recommend borrowers to choose financing with the shortest possible terms in times of high inflation,” explains Marc Kloetzel, authorized signatory and head of sales at KVB Finanz opposite the press portal.
E. Schmal / Editor finanzen.net
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