Inflation is here. You can see that easily in the rapidly rising cost of food, energy, clothing, rent and all essentials. Basically, everything you need to buy is going up in price. And it won’t be long before wages start to rise. That’s because workers will soon be demanding raises as they try to keep pace with rising prices.
Inflation makes it easier to pay off debts.
This is interesting. Inflation may work to your advantage. How? Because inflation can make it easier to for you pay off debts that have a fixed rate of interest. Here is why that happens.
If you have a car loan, that loan was made before inflation took off. The same is true of a fixed rate home mortgage. So, inflation will not make those payments go up because the payments are fixed in place.
The payments on fixed rate loans will stay the same, even though both wages and prices are going up. The lender does not get to raise the interest rate on a fixed rate loan.
Inflationary extra dollars you start to earn can make it easier to pay later – for what you already bought.
Prices tend to rise much faster than wages. Even so, you probably will get “cost of living raises”. The effect of those raises means you have more total dollars in your pay check. Those dollars won’t buy you more of anything. But those extra dollars can make it easier to pay for what you already bought. For example, the monthly payment on your fixed rate car loan and your home mortgage will not go up. They will stay the same, even though your paycheck has more dollars, (but with less purchasing power per dollar).
That also means the money your lender receives in each payment buys them less than it used to. You can ask for a raise to help make up for it. But, the lender can not ask you for a raise because they contracted for a fixed payment. You still get credit for the full payment that you just made using money that now buys less than it used to. That is true for you, and it is also true for the lender. (Lenders will try to adjust for this by charging higher rates of interest to new borrowers. But they can’t do that to you.)
Credit card payments usually have the opposite effect. Credit cards have adjustable rates. As inflation kicks into high gear the interest included in your credit card payments will also rise. That will make your minimum credit card payments go up. Your credit card payments will adjust upwards to keep pace with inflation. But your older, fixed rate loan payments will remain the same as they were.
Inflation will make your credit card payments go up.
Inflation makes each dollar worth less in terms of what it will buy, except for paying back old, fixed rate debts. Inflation reduces the purchasing power of what a dollar used to buy. But if you use inflated dollars to pay for fixed rate loans you already got, you are paying off those debts with cheaper money.
Here’s an example. Suppose the rate of inflation kicks up to 15%. As your wages rise to keep pace, you might have 15% more pay. For every $1000 that you used to earn, you now have $1150. (But it now takes $1150 to pay for the same things that you used to buy for $1000.) Except, when it comes to the monthly payments on fixed rate debts. If your car payment was $400, you can now take some of that extra $150 and use it to pay your car off faster.
Paying an extra $150 monthly on your car will pay it off almost 40% faster. In real terms, a 72 month car loan can now be paid off in just 43 months! Or, just you can keep paying the same normal monthly payment. Using the inflated dollars to pay the normal payments means that in “real terms adjusted for inflation” you are now paying the equivalent of money that has only the purchasing power of $340 today, to cover a $400 payment.
