The Impact Of Inflation On Loan Repayment And How To Manage It

Interest rates and inflation are inversely proportional to each other. This is because with low-interest rates people have a tendency of borrowing more from banks and not saving as much.

With an increased supply of money in the economy, demand is also created. The rise in demand, in turn, raises the prices of the commodities and causes inflation. If inflation rises above the comfort zone causing a disbalance in the economy, the Reserve Bank of India raises interest rates to curb the supply of money and therefore tame inflation.

Over the last one year, the consumer inflation rate has been consistently at a high level, due to which the RBI increased its benchmark interest rate by as much as 250 basis points since May 2022.

The repo rate was raised by the central bank as many as six times in the past year, bringing it to 6.5% at this time. Lenders have followed suit and have largely passed along the rise to their clients, increasing borrowers' monthly expenses.

With the high rates of interest, the new borrowers will have to shell out more for the loan they are seeking, while those with existing loans on floating rates are seeing a sharp rise in their monthly payments or EMIs.

How to Best Manage the Impact of High Inflation on Loan Repayment

Increasing Tenure

To soften the blow of the rising interest rates on the monthly outgo, one may opt for increasing the tenure of the loan. Through this option the impact will be felt in the long term as the loan will take longer to be repaid, however, it helps keep in check the current monthly expenses, especially for salaried people with fixed incomes.

It must be noted that the extension of a loan tenure is also based on the lender’s internal policies and the terms of the individual loan. For example, a lender may not provide an extension of the tenure if the loan is very new.

One may negotiate better terms to ease the impact of the rate increase if they have a credible history and good relationship with the lender.

Make Partial Payments

One can prepay a part of the loan if they have the ability to do so, this will help bring down the long-term liability. If the value of the loan is lowered with the prepayment, then one can also opt to reduce the EMI or shorten the tenure.

While some loans carry a penalty for pre-payment, debts like home loans can be prepaid without any additional costs. Certain loans also have a lock-in period, or the lenders don’t allow part payments and only accept a full repayment. Therefore, one must research and be aware of all these terms of the loan before planning to make any advanced repayment.

Transfer Loans to More Competitive Rates

There is now a wide variety of options for lenders leaving the borrower spoilt for choice. Lenders, be it banks or non-banking finance companies, are extremely competitive as they try to grow their businesses.

They extend various offers and schemes, competitive interest rates, and easy terms for repayment to attract new customers. Therefore, a borrower can check if another lender is providing better rates and terms for the loan. If agreeable, then the borrower can transfer the loan to the other lender.

Most times, when the customer seeks to transfer out of a lender, the latter tries to retain the account by matching the new offer or at times even providing a better one.

Conclusion

As the inflation level continues to be at higher levels, the RBI is still being extra cautious and there are indicators of a further rate hike. This would mean more burden on the borrower with higher monthly outgo.

Therefore, it is important for one to plan their monthly expenses carefully keeping a little leverage to absorb any further rate hike that may take place. This will help the borrower to keep the obligations and avoid any default on the loan. Default on a loan attracts hefty penalties and can increase the borrower’s woes.

One can also opt for the extension of the tenure of the loan, part payment of the loan to reduce liability or transfer the loan to a lender that offers better rates and terms.

IIFL Finance is one of the most reputable lenders that offers loans at the most competitive rates. It also offers flexible repayment terms keeping in mind the convenience of the customers to ensure that the borrower can repay the loan with ease.

Applying for an IIFL Finance loan is easy and the entire process can be completed without any hassle online and from the comfort of one’s home.