Javeed is unable to pay his business loan of Rs. 10 lakhs and take a personal loan of ₹500,000 to boost his restaurant business. However, the cost of cooking essentials skyrockets, which causes Javeed to raise the food’s price. Due to this, he loses his customers. Unable to pay his multiple loans and EMIs, he goes for loan consolidation, i.e. Debt- Consolidation Business Loan. Now he has relief from financial burden and strives to bounce back his business.
| Principal Amount | Interest rate | Tenure | EMIs | Total Loan Amount | |
| Loan 1 | ₹ 10,00,000 | 18% | 5 | ₹ 25,393 | ₹15,23,606 |
| Loan 2 | ₹ 5,00,000 | 13% | 3 | ₹ 16,847 | ₹ 6,06,491 |
The cost of business operations is also high.
| Shop Rent | ₹20,000 |
| Electricity Bill | ₹35,000 |
| Food Costs | ₹25,000 |
| Movable Assets | ₹ 45,000 |
| Grand Total | ₹125, 000 |
Inflation is a part of an economy. It is one of the key factors of a country’s GDP. Inflation directly impacts goods and services. Despite the inflation, the RBI still does not change the current repo rate of 6.50%. But do you know how inflation affects debt? Are you aware of how people still take loans during inflation time? This blog expounds on inflation and its impact on debt.
Inflation: A Brief Introduction
The rise in prices of goods and services is called inflation. It depends upon the demand and supply in the background of the global and domestic markets. High inflation impacts consumers’ purchasing power and stagnates goods and services. For example, the price of 22 karat gold is ₹ 7,150.
The decrease in prices enables everyone to buy and accelerates the growth of the economy. High inflation with high rates of interest for loans can decline the borrowings. As a result, this impacts the economy of the country.
India’s Inflationary Time
All the goods and services of India increase every year. However, after COVID-19, there is a tremendous impact on prices due to inflation. Factors such as the global supply chain, crude oil prices, the Ukraine-Russia war, barriers to food supply, and many others influence inflation.
The Reserve Bank of India (RBI) takes meticulous policy to control inflation and economic growth. For example, the report rate is 6.50%, which can be changed by the RBI to control inflation.
Impacts on Borrowings
- Interest Rate
Inflation directly affects the interest rates of borrowings. To control inflation, the RBI may increase the interest rates. This affects the borrowers and leads them to pay more EMIs.
A higher cost of borrowing discourages new borrowers from taking loans. This can impact economic growth. For example, the interest rates of personal loans may increase or decrease by a repo rate of 6.50%.
- Impact on Lifestyle
Inflation can change the spending habits of consumers. Because everyone cannot afford to pay high prices for goods and services. Indeed, people expect a rise in the prices of goods. This act can stimulate people to take loans.
When the demand for loans increases, banks may bring strict regulations to control the borrowing. For example, when the price of onions rose to ₹95 per kg, many people looked for alternate ingredients to cook.
- Refinancing
It is a financial strategy where existing loans are replaced with new loans that have reasonable interest rates and tenure. Refinancing benefits the borrowers and improves their financial budget. Since inflation impacts borrowings, those with multiple EMIs may face difficulties.
This leads to debt consolidation with reasonable interest rates. For example, the current loan may have a 16.6% interest rate. If the interest rate goes below the existing one, refinancing is the best option.
- Impact on Low-Income Borrowers
High inflation directly affects low-income people in obtaining a loan. It can also become a barrier to accessing the credit. This decreases the borrowings and cash flow. For example, a personal loan of ₹3,00,000 lakhs with 15% interest rates and 5 years tenure leads to ₹7,137 as EMI, which is unaffordable.
Impact of Inflation on Business Borrowing
All the businesses are impacted by high inflation. The increase in raw materials, wages, spare parts, and basic needs can create a financial burden on a business. The high interest rates on loans can deter borrowing and impact economic growth.
- Less Investment
Inflation can make the company have less investment. This can lead to less output. So the high price and less productivity cannot bring a balanced profit to a company. Sometimes, inflation can lead to layoffs, affecting the workers.
- Decrease in Cash flow
During inflation, business operations face cash flow challenges. When a company has less cash flow, it cannot expand the business. This leads to less productivity and growth, and the loop of decreased cash flow begins.
Conclusion
Inflation is a challenging indicator of a country’s economy. The market situations and fluctuations in demand and supply directly influence the prices of goods and services. As a result, the interest rates on loans may go high. This will impact the borrowers and hamper economic growth. After consideration of these factors, one must take a loan.