What is the effect of inflation?
As a result of inflation, the value of tomorrow’s money decreases with regards to today’s money. In other words, you can purchase less with the same amount of money. This is commonly seen as prices having increased. This can make the situation appear more appealing for borrowers because they can buy today and pay back with less valuable dollars. But lenders and creditors don’t appreciate receiving less valuable dollars. So, in order to offset the declining value lenders and creditors increase the interest rates they charge. Thus inflation in general results in increased financial problems all around. It not only results in rising commodity prices but in increased interest rates as well. Inflation is mainly caused by governments. Because of high borrowing and deficit spending they find it necessary to increase the money supply which results in the value of each individual dollar in circulation being worth less.
Unfortunately, there is nothing much that you as an individual can do about inflation. You will either have to suffer as a result of the inflation or find ways to manage your own finances to reduce debt.
Effects of inflation on debt consolidation
As prices rise, you may consider consolidating your debts in order to reduce your monthly debt burden. But, there are pitfalls attached to debt consolidation in times of inflation. Debt consolidation is a process through which you group together all of your debts as a single debt, preferably with a lower interest rate. This helps you to pay off your debts faster and as easily as possible, with either lower monthly payments or more of each payment going toward principal. This is easier as interest rates are falling, but more difficult when the interest rates rise as a result of inflation.
The main factor to watch with regards to consolidation is the interest rate. The lower the interest rate you pay on the consolidation, the more affordable for you to make the monthly payments on the consolidated debt. So if you can eliminate high credit card rates and pay a lower consolidated rate, more of your payment will go towards principal and less toward interest. Thus you will be able to pay off the debt faster.
When you consolidate debts, you are rolling over several unsecured debt as one, so you can make one payment a month rather than several. In addition to the convenience factor it makes it easier to monitor your balance and track your progress toward becoming debt-free. Just be sure that once you move your debts from the credit card to a consolidated loan that you don’t go back and run up your credit card debt again or the final situation will be worse than the start.
If You Can’t Get a Lower Interest Rate
There are various ways to consolidate your debts, like balance transfers or taking out a consolidation loan. In a high inflation environment, or a market when credit is tight (i.e. when lenders don’t want to take on additional risks) even with the help of a consolidation company, your creditors may not agree to lower your interest rates much (if at all).
If you can’t get a lower interest rate, the amount that you will be required to pay each month may actually increase due to consolidation company fees, refinancing fees, etc. Thus, the only advantage of getting your debt consolidated may be a convenience factor.
Sidney Terrell is an associate writer with Oak View Law Group. Her expertise includes finance and investment. She has written several articles on debt settlement, bankruptcy, bill consolidation and mortgage since 2005.