The Impact of Inflation on Loan Interest Rates in 2024

ELIZABETH S. | April 24, 2024

Inflation is one of those things that none of us want to think about—after all, it rarely means good news. And when the inflation rate goes up, it certainly isn’t something we want to celebrate. Yet the fact is that the current inflation rate is sitting at 3.5%

What does that mean? When inflation rates increase, it generally leads to higher loan interest rates, impacting everything from mortgages to personal loans. Despite signs that inflation was cooling, recent data from March 2024 has reignited concerns, casting doubt on the potential for Federal Reserve rate cuts. 

This uncertainty affects loan interest rates directly, as they often adjust in response to Fed policies intended to control inflation. As 2024 continues, consumers need to monitor these trends, as they will influence the cost of borrowing across all forms of direct lending. 

Blocks showing the rising rate of inflation

The Relationship Between Inflation and Loan Interest Rates—The Basics

The relationship between inflation and loan interest rates directly influences the terms and conditions under which all lenders operate. At its core, inflation represents the rate at which the general level of prices for goods and services is rising, thereby eroding purchasing power.

The Federal Reserve (the Fed) can adjust federal interest rates, commonly known as the federal funds rate to combat inflation. When the Fed raises these rates, it becomes more expensive for banks to borrow money. In turn, these banks and other lending institutions increase the interest rates at which they lend money to consumers and businesses. This is intended to cool down economic activity by making borrowing more expensive, thereby slowing down consumer spending and business investment.

On the other hand, when inflation is low, the Fed might lower the federal funds rate to encourage more borrowing by making loans cheaper. This would stimulate economic activity. These adjustments influence the interest rates on all types of loans, including mortgages, personal loans, and credit lines. It even impacts short-term loan interest rates.

Direct lenders, like those operating in short-term and installment loans, are also affected by these macroeconomic changes. However, their operations are further complicated by state-specific regulations that may cap loan interest rates, limiting how much they can charge consumers relative to the broader market trends dictated by the Fed's rate adjustments. 

This additional layer of regulation means that even if federal rates increase to counteract high inflation, direct lenders in certain states may be unable to adjust their loan interest rates accordingly to maintain profitability and risk balance. This can affect their business models and credit availability to consumers, especially in highly regulated states. 

Should You Borrow When Inflation is High?

This often begs the question of whether or not borrowing is a good idea when inflation rates are high. The challenge, however, is that your need for additional funds often has nothing to do with the inflation rate. You may experience financial emergencies and simply not have enough sitting in your savings account to cover the expense. If the financial emergency is related to fixing your car, covering a major medical expense, or fixing a leak in the plumbing, you can’t simply wait for inflation and interest rates to drop. 

So, if you are in need of money, despite your best efforts at budgeting, taking out an installment loan, cash advance loan, or title loan might be your best choice. This said, do your homework to ensure you can take on the added responsibility of the loan payment. Here are a few things to consider if you need to borrow funds despite high inflation.

  • Assess the Cost of Borrowing: High inflation often leads to higher interest rates. Calculate the total cost of the loan, including interest and any associated fees, to determine whether the financial relief is worth the long-term expense.
  • Consider the Loan Type: Different types of loans (e.g., installment loans, cash advance loans, and title loans) have varying terms and interest rates. Consider your current and anticipated financial situation to choose the one that best suits your ability to repay.
  • Evaluate Repayment Terms: Look closely at the repayment schedule and ensure it is manageable within your budget. Consider how the repayments will interact with other financial obligations.
  • Emergency vs. Non-Emergency Expenses: Determine if the loan is for an emergency expense that cannot be deferred, such as medical bills or critical home repairs. If the expense can wait, saving gradually rather than borrowing immediately might be better.
  • Potential for Income Stability: Reflect on the stability of your current income. If inflation is high and economic conditions are unstable, ensure that your income is secure enough to cover ongoing loan payments without jeopardizing your ability to meet your other financial obligations.

Person working on their interest rate with the rising rate of inflation

Prepare for Inflation Rates to Remain Volatile

They also say to prepare for the worst and hope for the best, and this certainly holds true when it comes to inflation. At Cash Store, we recommend that you take the appropriate steps to manage your finances each and every day. 

Take charge of your savings so that you have a rainy-day fund to cover those emergency expenses. Do what you can to protect your credit score, as doing so will help you access lower interest rates. 

In need of fast funds. Cash Store can help. Get started today by clicking on Pre-Qualify Now to see how much cash you could receive.

The content on this page provides general consumer information or tips. It is not financial advice or guidance. Each person’s circumstances are unique. The Cash Store may update this information periodically. This information may also include links or references to third-party resources or content. We do not endorse the third-party or guarantee the accuracy of this third-party information. There may be other resources that also serve your needs.

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