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Does inflation favor lenders or borrowers?

A:

Inflation can fringe benefits either the lender or the borrower, depending on the circumstances.

If wages increase with inflation, and if the borrower already owed rolling in it before the inflation occurred, the inflation benefits the borrower. This is because the borrower restful owes the same amount of money, but now he or she has more money in his or her paycheck to pay off the in dire straits. This results in less interest for the lender if the borrower uses the unused money to pay his or her debt early.

Inflation can help lenders in several go to pieces b yield, especially when it comes to extending new financing. First, higher sacrifices mean that more people want credit to buy big-ticket things, especially if their wages have not increased – new customers for the lenders!  On top of this, the violent prices of those items earn the lender more interest. For pattern, if the price of a TV goes from $1,500 to $1,600 due to inflation, the lender get ti more money because 10% interest on $1,600 is more than 10% incline on $1,500. Plus, the extra $100 and all the extra interest might eat more time to pay off, meaning even more profit for the lender.

Subscribe to, if prices increase, so does the cost of living. If people are spending multifarious money to live, they have less money to satisfy their constraints (assuming their earnings haven’t increased). This benefits lenders because people poverty more time to pay off their previous debts, allowing the lender to together interest for a longer period. However, the situation could backfire if it culminates in higher default rates.

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