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How Inflation Can Help You with a Loan: Understanding the Concept with Calculations
Inflation is the general increase in the prices over time, which reduces the purchasing power of money. While inflation is often seen as a negative force because it erodes the value of savings, it can actually work in your favor when you have a fixed-rate loans. Here’s how inflation can help with a loan, along with some calculations to make it clear.
How Inflation Affects Loans.
When you take out a fixed-rate loan, you agree to repay the loan in fixed instalments over time. Because these payments are fixed, they don’t change with inflation. As inflation increases, the value of the money you use to make these payment decreases, effectively reducing the real value of your loan repayments over time.
Example Scenario
Let’s say you take out a loan of ₹5,00,000 at a fixed interst rate of 10% per annum for a term of 5 years. Your monthly EMI(Equated Monthly Installment) would be approximately ₹10,624.
Below is a simplified example of how inflation affects the real value of you loan payments over time.
Loan Details:
- Loan Amount: ₹5,00,000
- Interest Rate: 10% p.a.
- Loan Tenure: 5 years(60 months)
- Monthly EMI: ₹10,624
