There is no doubt that the world is experiencing a surge in inflation. In Singapore, particularly, the annual inflation rate rapidly climbed from 7% in July to 7.5% in August last year. Inflation occurs when prices increase, and the purchasing power of an individual’s dollar falls. Although most economists agree that inflation is not entirely a bad thing, it has an impact on numerous things, including loans.
How inflation impacts your loan depends on two factors: the rate of inflation and whether your loan has a variable or fixed interest rate. A loan with a variable rate has an interest rate that moves up and down depending on fluctuations in the principal rate or changes in the market. On the other hand, a fixed-rate loan is a loan in which you pay the same amount every period throughout the duration of the loan, regardless of the inflation rate.
Previously, we’ve discussed whether taking up personal loans amid inflation is a good idea. But if you’re planning to take up a fixed-rate loan during this period, then perhaps this article might help you decide! In this article, we explore whether you should obtain a fixed-rate loan amid inflation.
The advantage and disadvantage of fixed-rate loans
When the inflation rate rises, the fixed-interest rate financing an individual took out costs them less than when they obtained the loan since the inflation led the dollar to lose some of its value. Here, you are essentially paying back your lender money that is worth less than it was when you obtained the loan.
Aside from this, revenues and wages have a tendency to increase during seasons of high inflation. Therefore, if you are earning more money, but your monthly loan payments remain the same, then the payments cover a smaller percentage of your operational capital.
Meanwhile, when the inflation rate falls, your fixed-rate loan remains the same, but there will be a general decrease in your interest rates. When this occurs, the interest rate on your fixed-rate loan may not appear as favourable as it did when you obtained the financing.
Are fixed-rate loans still ideal amid inflation?
Generally, the predictability of fixed-rate loans is seen as a good thing, especially for business owners. Most business owners know how much money they need and how long they need it. For these borrowers, fixed interest rates are often better since a fixed rate enables them to predict accurately the amount they will have to pay each period and the possible cost of the financing over the duration of the loan.
Now, this preference still remains for borrowers who own businesses even amid inflation induced by a health crisis like the COVID-19 pandemic. Although it is possible for a period of reduced interest rates to take some of the spotlight away from your fixed rate, you can also receive some benefits if the interest rates are high.
Furthermore, it is not usually ideal for your financing choices to depend on inflation rates, as future inflation rates are difficult to predict. Financial experts have yet to arrive at a consensus on how the current health crisis has affected inflation.
In essence, although fixed-rate loans are usually recommended to satisfy the needs of one’s business or other ventures, this does not necessarily mean that variable-rate loans do not have their benefits. Ultimately, the best way to determine what is suitable for your business is to reach out to a financing expert knowledgeable about financial solutions and how they are affected by state affairs or market situations like inflation.
For the most reliable and extensive financial assistance to help sort out your financial concerns, Orange Credit is the expert you can trust! We are a seasoned and reputable money lender that offers a wide range of valuable loans with fast loan approval in Singapore. Whether you need a business loan to cover your business expenses or instant cash loans to meet a financial emergency, we surely have the right solution for you! Don’t hesitate to contact us today to learn more about our beneficial loans.