We’re now in a period of high inflation!

The Straits Times reported on June 16 that interest rates had been raised by "75 basis points," the largest increase since 1994, in response to the inflation surge caused by “the war in Ukraine and global supply concerns”. Even if you don't understand what basis points are (you can learn more about them here), it's pretty telling that this has caused the largest increase in Singapore's interest rates since.

You may think that the sudden increase in interest rates and surging inflation spell doom for the entire economy, but we're here to assure you that it's not all that bad – it might even be a good idea to take up a personal loan during this supposedly bad time!

What is inflation?

According to Investopedia, Inflation is defined as a phenomenon when there is a decline in the value of money, especially when weighed against “an increase in the average price level of [goods and services] in an economy over some period of time”.

Inflation is calculated by the inflation rate, which measures the annual percentage rate of change in the general price index of goods and services in an economy. If you’d like to experiment with how prices change as a result of inflation, we recommend using these calculators provided by the Monetary Authority of Singapore.

How does inflation affect me?

Inflation affects us in a variety of ways, some obvious and some less so. Here are some examples:

Increases the cost of living

When there is inflation, goods and services are more expensive to buy because the value of money has decreased. When this occurs, you will have to pay more in cash to be able to afford a specific good or service because its value has increased in comparison to the depreciated value of money. As a result, prices for goods and services will rise to reflect the decrease in the value of money due to inflation.

This creates a situation in which the cost of goods and services, as well as your overall cost of living, skyrockets.

Overturns the value of your assets

Another thing inflation does to you is that it overturns the value of your assets, and you might flip between feeling poorer or richer all of a sudden.

If your assets remain stagnant or grow at a rate slower than current inflation rates, they will depreciate and you will lose money.

Simply focusing on one type of asset, namely savings in your local bank, the Monetary Authority of Singapore notes that average interest rates for savings accounts in banks have been less than 1% since 2001. Given that the average inflation rate in Singapore, as calculated by SmartWealth SG, was more than 1% in 2001, your savings will be worth less in 2021 than they were in 2001.

In contrast, you might be able to profit from inflation if you can get your assets to earn returns that are equal to or greater than the current rate of inflation!

Loans become more expensive

Another way inflation makes things more expensive is that it raises the cost of borrowing, aka your loans.

The interest rates on loans (along with other monetary interest rate values) set by banks in Singapore are pegged to the US Federal Reserve rates, according to The Simple Sum. As a result, during a period of global inflation, such as now, interest rates on loans will rise in tandem with the US Federal Reserve's interest rate hike, resulting in a higher cost of borrowing for individual borrowers seeking a loan.

If a borrower took out a floating (variable) rate loan, inflation can be a hassle because current loan interest rates are tied to rise in line with inflation, making the repayment of such loans more expensive. The fact that floating (variable) rate loans are become more expensive in inflation is also bad news for those looking to apply for a new one.

Some good news

Contrary to popular belief, the best times to apply for a personal loan and use it as leverage are actually during periods of high inflation.

This is especially so thanks to the nature of personal loans in Singapore.

As was already mentioned, taking out floating (variable) rate loans usually costs the borrower money. The good news is that because personal loans in Singapore are all fixed-rate loans and do not fall into that category, borrowers typically gain instead of losing money if they take out a personal loan during periods of high inflation.

How can taking a personal loan benefit me?

Taking up a personal loan during times of high inflation can work in your favour due to this reason: Because your loan and repayment schedule and amounts remain unchanged due to the personal loan's terms being a fixed-rate loan, money now has less value than it did when you first borrowed. This means that personal loans become cheaper to take as you’ll end up paying back with money that is worth less now than it was when you borrowed it.

Interested in getting a personal loan?

Lendela partners with multiple banks and financial institutions that offer personal loans at a fixed rate. You can be confident that we will tailor and provide the best rates for you based on your particular situation because we only send you offers based on your profile (completed with SingPass, or otherwise).

What makes using our platform better is that you’ll have multiple personal loan options to choose from, and you’ll get to decide which one will be the right one to leverage and benefit from during this financially uncertain time!

Explore your multiple options at no cost with Lendela here.