The inflation rate is a metric used to determine how much all goods and services cost over time. Normally, it is expressed as a percentage change from month to month and year to year.
Based on the Consumer Price Index, inflation rates are calculated from a basket of goods and services that a typical household would purchase, including food, fuel, utilities, apparel, medical care, cars, etc.
Interest rates, on the other hand, estimate how much it will cost you to borrow money each year. Lenders determine the interest rates to charge their customers based on various factors, including economic conditions, creditworthiness, type of loan, and others.
Although inflation doesn’t directly affect interest rates, the two typically correlate indirectly.
Low-interest rates can flood the market with extra cash, which leads to consumers borrowing and spending more, ultimately driving inflation higher. When inflation rises, interest rates are also likely to rise; this slows consumer spending and borrowing again, eventually resulting in decreased inflation and normalized standards.
How does inflation affect your payday loan interest rates
The borrower should not be affected by inflation if you already have a payday loan and the rate has been fixed. It is because the total amount you will be required to pay back, which is called the Annual Percentage Rate (APR), is calculated and fixed while you apply for a loan.
You can calculate your fixed APR by including the interest rate on your payday loan. The interest rate you pay back will therefore remain the same throughout the term of the loan. There can be both positives and negatives to this; if the inflation upscales, your repayments will not increase, and you will not be able to save money the inflation downscales.
However, generally, payday loans with amounts under $2000 are fee-based in Australia, so there is no APR applicable.
There is only one scenario in which you might be affected by fluctuating inflation in interest rates, and that is if your interest rate is variable. In the event that your fixed rate of interest on your payday loans comes to an end, you will automatically switch to a Standard Variable Rate. Based on inflation and the bank’s base rate, the default payday interest rate can change depending on the circumstances.
Since both inflation and interest rates play a role in determining and shaping the economy of a state and country, borrowers should keep both factors in mind and their correlation. Short-term lenders, like Spondooli, invest the amount of interest collected from payday loan borrowers in other sectors. It means that to function effectively, the interest rates of these banks need to rise or fall in accordance with the inflation rate on a yearly basis.
Be sure to check your payday loan terms to ensure that you won’t be hit by inflation through variable interest rates. At Spondooli, we search the market to find you a repayment plan that suits your needs. Browse our loan products today.