Lenders and borrowers during inflation

[odunybiz]

Inflation has increased rapidly over the last year at the world has emerged from the pandemic. At the moment in the world where inflation rate keep increasing, borrowers benefit the most. Especially in a long time loan, borrowers pay back money with a less purchasing power compare to the time the loan is borrowed. A typical example can be seen below between two men in Nigeria.

Man A: He bought a tricycle in November,2021 on hire purchase at #1,400,000 when the real price was around #900,000. He his to pay back within 16 months

Man B: He bought a tricycle in July,2022 on hire purchase at #1,900,000 when the real price was now #1,300,000. He his to pay back within 16 months.

👉👉Observation: Comparing the two men with the lenders profit when loan was given, if in just 9 months the purchasing price of man B is close to the total amount payed back (purchasing price + interest) by man A, what happens at the end of the 16 months if inflation keep increasing. If the lender decide to buy a tricycle after man A had finish paying his money. He will end up adding to the money before he can purchase one. When lending money to man A, the lender believes he’s making a profit of #500,000 but this doesn’t worth it anymore within that 16 months as inflation keeps increasing.

👉👉Conclusion: People with good and profitable businesses can borrow money to boost their business during inflation. They will always be at the gaining side if the money is utilized well.

[Welsh]

👉👉Conclusion: People with good and profitable businesses can borrow money to boost their business during inflation. They will always be at the gaining side if the money is utilized well.

Somewhat. Although, there's no guarantee of it. We have to remember that assets generally depreciate in value because they get dings, scratches or just degrade with time. So, selling a second hand asset is usually more difficult than selling a new. Obviously, this sort of ignores collectors items, but cars for example are generally considered to have already lost a few k on their price as soon as you drive them off the forecourt.

However, as long as your loanee pays back the amounts required, lenders will always gain. That's sort of the broken system we live in, where normal people require to lend off the rich, and as a result the average person loses in the long run, while the rich get richer. That's basically how the system is designed, and as worked for as long as we've all been alive.

Inflation isn't really a bad thing for the rich, they'll profit enormously on it.

[Poker Player]

I do not agree with the idea that borrowers are the ones who gain from this, only a few borrowers who know very well what they are doing and who have a great capacity for self-control do so.

In other financial threads I commented it: it is the debate of which system is better to improve your financial situation, Robert Kiyosaki's or Dave Ramsey's system.

The former advocates going into debt to acquire financial assets, mainly RE and the latter advocates getting rid of all debt and avoiding debt like the plague.

Mathematically for a robot or an AI, it would be Robert Kiyosaki's but in real life for most people it's Dave Ramsey's.

[$crypto$]

In this case, the problem is not only in terms of inflation. I put inflation aside and let's look at the time span between man A and man B. 2021, of course, where the pandemic conditions are severe enough that prices, apart from rising prices, are also increasingly difficult to pay. Then man B did in July 2022, automatically if the statistical calculation of the time span and the economic cycle would certainly make the price of goods increase more drastically, plus the cost of goods after the recovery. Why do I lead my opinion to real conditions where the economic cycle changes every year and inflation after the pandemic is much deeper.


Back to the topic, it's not entirely the lending and borrowing system that benefits one party because man A and man B have an actual price difference of #400,000 (with the same amount).

[so98nn]

Borrower does take huge risk with the loans. I mean if they are borrowing in the high times then they should make sure that they are having good profitable business too. They are borrowing but they should plan and execute their business thoughtfully otherwise how they gonna repay the loan? It's not about how much difference are they getting benefited for the "value" of something but its about how the borrowed money will be returned along with the principal + interest in the high time.

I am stressing on this because, in such inflationary times, business also slows down based on the nature of business. For example, if it bicycle business and we are in inflationary times then why would anyone spend money on it and not on the food reserves or may be healthcare needs etc? This could indirectly affect that kinda business. While on the other hand healthcare, food industries may get benefited as it is the daily need to survive. You can walk if you dont have biycyle but you cant live if you dont have food!

So its not just about borrowing and lending calculations, its also about where the money being invested? Do they have that much returns in the current period? Is it going to stay stable for the tenure of loan and much more!

[Apocollapse]

It's depends on how much the lenders ask the interest, if he's ask the interest that greater than the inflation, the lenders will take the benefit. I don't think the lenders are stupid and not knowing about how big is the inflation percentage, maybe they're just an average Joe who started to lend their money e.g. from your friend, neighbor etc. If you borrow money from banks, they will ask you around 10% interest per year which is very high.

[inthelongrun]

I get your point OP but I am very curious. Is your example realistic in your country? Man A's loan interest is 3.47% monthly while Man B's is 2.88% monthly. So these figures are normal loan interests in Nigeria? In my country, banks' interests are around 2% monthly. But I also heard that in very rich countries, personal loan interests are very low.

Somewhat. Although, there's no guarantee of it. We have to remember that assets generally depreciate in value because they get dings, scratches or just degrade with time. So, selling a second hand asset is usually more difficult than selling a new. Obviously, this sort of ignores collectors items, but cars for example are generally considered to have already lost a few k on their price as soon as you drive them off the forecourt.

Well, I assume OP's tricycle example is utilized for transportation services. Tricycles are common means of transportation in some countries, especially in rural areas and outskirts of cities. So it will be income generating. If I am right, then Man A benefits well since he is already earning income for a year.

I do not agree with the idea that borrowers are the ones who gain from this, only a few borrowers who know very well what they are doing and who have a great capacity for self-control do so.

In other financial threads I commented it: it is the debate of which system is better to improve your financial situation, Robert Kiyosaki's or Dave Ramsey's system.

The former advocates going into debt to acquire financial assets, mainly RE and the latter advocates getting rid of all debt and avoiding debt like the plague.

Mathematically for a robot or an AI, it would be Robert Kiyosaki's but in real life for most people it's Dave Ramsey's.

Perfectly said. And personally, I also prefer Dave Ramsey's system. Financial assets are accompanied by risks though just like what happened before in the US when its real-estate market collapsed. But I am also a huge believer in real estate and raw lands, only because my country is small with over 100 hundred million population.  

[bitzizzix]

Traditionally, borrowers have benefited more from inflation, because the money they pay back is worth less than when they borrowed it. That is why, when inflation rises, the interest rate charged by lenders also rises.
e.g. If I borrow 3% money to buy a house for $50,000, and inflation rises to 6%, over time I have paid back significantly less than the purchasing power equivalent of my original loan.

[Iadegbola34]

I don't believe there's a winner between the borrower and lender when the inflation rate is high. It might appear to be profitable to the borrower based on your description but it's not. Inflation affect the cost of living of the general populace.

To use the same example you used, both Man A and Man B won't agree with you that they have gained over their lenders at the end of their repayment time. Why? Because the money they realized from using the tricycle is spent on more expensive things. The fuel price, maintenance fee, and road-use tariffs would have increased from the time they purchased the tricycle.

In conclusion, inflation is never a win-lose or win-win situation. It's always a lose-lose situation.

[odunybiz]

I do not agree with the idea that borrowers are the ones who gain from this, only a few borrowers who know very well what they are doing and who have a great capacity for self-control do so.

It just a real fact, it's practicable enough. Even the example given made it clear. Although the lender made some profit through interest but during inflation the profit will have lose It's value. Imagine the interest rate is just 3- 4% and inflation rate is up by 9% or more. This is happening here in Nigeria as price of good and commodity keep increasing everyday.

[Mometaskers]

Mathematically for a robot or an AI, it would be Robert Kiyosaki's but in real life for most people it's Dave Ramsey's.

I think understand what you mean. I actually know people who don't even pay their UTILITIES in full, let it accumulate and then get shocked when they got their water and electricity cut - and then have to shell out an extra fee to have it reconnected.

It's just not that easy for some of us to get a grip on these. For example when I borrow I'm not even thinking of what OP was saying that I'd be paying less or whatever, I just want to know the difference in price between getting the stuff on installment vs paying for it in full.

[odunybiz]

👉👉Conclusion: People with good and profitable businesses can borrow money to boost their business during inflation. They will always be at the gaining side if the money is utilized well.

Somewhat. Although, there's no guarantee of it. We have to remember that assets generally depreciate in value because they get dings, scratches or just degrade with time. So, selling a second hand asset is usually more difficult than selling a new. Obviously, this sort of ignores collectors items, but cars for example are generally considered to have already lost a few k on their price as soon as you drive them off the forecourt.

There is a clear difference between asset and liability. A car isn't an asset but a liability. Asset appreciate even during inflation. A typical example of an asset is a land. A plot of land bought in few years back will be sold at an increased price if the owner decide to sell it now.

However, as long as your loanee pays back the amounts required, lenders will always gain.

Gain will be made on interest but will have lose it value. If the inflation rate is higher than the interest rate, the purchasing power power of the interest will be low due to inflation.

Inflation isn't really a bad thing for the rich, they'll profit enormously on it.

Rich people utilize all opportunity during inflation to get richer but poor people keep complaining all around about price of good and services without doing anything to improve the system.

[Moeda]

Actually, the lender and the borrower by using the interest rate measure are equally detrimental. The nominal value of banknotes is always changing, the numbers are still the same, the value is getting smaller. Of course, the one who loses the most is the recipient of the loan.
During the pandemic, loan interest rates were increased, especially for creditor companies.
Unless someone borrows from a friend who doesn't pay interest to the beneficiary.

[Darker45]

First and foremost, inflation is happening all the time. It is a constant. So I assume that by inflation here, you specifically refer to the times when the inflation rate goes beyond the target.

If you borrow money when the inflation is high, there are two tendencies. One, it could mean you will pay back with a cheaper money or money with lower value. This means you're indeed taking advantage of the rising inflation. But this is only possible if inflation continues rising or if things worsen over time, especially if this translates into increasing wages since goods and services are also getting more expensive.

However, borrowing money in the middle of a rising inflation could also mean you will be paying money with more value. And instead of taking advantage of the rising inflation, you are actually putting yourself at a disadvantageous position. An inflation rate going far beyond the regular rate would definitely be addressed. Various measures would certainly be implemented to counter it or tame it down. In which case, you might end up paying during the time when money has already recovered much of its value.

I think the best time to borrow is before inflation, that time when money is still in high value. And the payback time will be in the middle of rising inflation.

[Smack That Ace]

It's depends on how much the lenders ask the interest, if he's ask the interest that greater than the inflation, the lenders will take the benefit. I don't think the lenders are stupid and not knowing about how big is the inflation percentage, maybe they're just an average Joe who started to lend their money e.g. from your friend, neighbor etc. If you borrow money from banks, they will ask you around 10% interest per year which is very high.

I also don't think the lenders would be stupid enough to not be able to calculate the inflation rate, they are the people with the money and the lenders taking interest. How is it possible for them to lend you money and the interest belongs to you at the same time?

In the same way as the banks are today, interest rates will always be adjusted to match inflation, otherwise, even some of the banks might go bankrupt, not just the outside lenders.

[adaseb]

If you took a loan before all this covid mess or during the covid panic low when interest rates were very low then obviously it was a smart decision. Especially if you got the interest rate locked in. Most likely you will get a raise and will be able to pay it off earlier so it’s like you are under paying.

However now getting a loan is different. Especially if you want it unsecured. And even a secured loan like a car or house is expensive with the high interest rates. I guess this is the point to cut down on inflation.

[Davian144]

Actually, the lender and the borrower by using the interest rate measure are equally detrimental. The nominal value of banknotes is always changing, the numbers are still the same, the value is getting smaller. Of course, the one who loses the most is the recipient of the loan.
During the pandemic, loan interest rates were increased, especially for creditor companies.
Unless someone borrows from a friend who doesn't pay interest to the beneficiary.

Some of those who borrow are not aware of this because the borrower is usually in great need of money so he does not think about the losses he receives after borrowing.
Especially in a pandemic condition, almost everyone finds it difficult to get money and also at that time not many parties or people dared to give loans without interest to everyone.

[Zilon]

👉👉Observation: Comparing the two men with the lenders profit when loan was given, if in just 9 months the purchasing price of man B is close to the total amount payed back (purchasing price + interest) by man A, what happens at the end of the 16 months if inflation keep increasing. If the lender decide to buy a tricycle after man A had finish paying his money. He will end up adding to the money before he can purchase one. When lending money to man A, the lender believes he’s making a profit of #500,000 but this doesn’t worth it anymore within that 16 months as inflation keeps increasing.

Price might not worth it anymore but lender did make some profit. Adding up to make fresh purchase doesn't mean man A ran at a loss. Imagine man A bought more tricycle before the inflation sets in he will definitely and sold them at the price man B purchased his for, It means man A will be in more profit than man B.  

[hugeblack]

It is not calculated like this unless inflation in the country is high and therefore it will form a harmful pattern because when you borrow, you pay the interest on the loan first and then pay the capital, then the borrower will be able to recover his capital in a short period, but the problem remains when hyperinflation.

When this happens, the capital will flee from the cash currencies and head to safe havens of gold, assets or even lands, and therefore you will not find anyone to lend you or at a high interest rate that makes the recovery of capital within the first 6 months only.

Also, inflation does not continue to rise forever, and when the opposite happens, you may end up paying a lot, especially if the value of the local currency improves

[jrrsparkles]

Well it's applicable on the normal circumstances but when the inflation rate increases than the expected rate then the interest rate of the loan may also be changed by the bank in the middle so the borrower has to pay more than what he has been doing but the income of the person may not be higher as same as the inflation rate hike.