The ECB has been increasing its key interest rates for some time, which primarily makes it more expensive to take out loans, because the interest rates on loans also rise with the key interest rates. Companies, but also consumers who had become accustomed to the zero or low interest rate period after the financial crisis are now experiencing the return of interest rates and are sometimes coming under considerable financial pressure.
Is it still worth taking out a loan now?
The debit or nominal interest rate on loans of all kinds is currently increasing due to the increases in the key interest rates of the European Central Bank, regardless of the provider and the purpose of the loan. The ECB wants to use this to counteract the high rates of inflation, because the increase in the cost of credit reduces the total amount of money in circulation, which in turn reduces demand. In theory, falling demand should lead to falling prices if supply remains the same, because suppliers are now competing for fewer consumers.
At least in part, this remedy actually seems to slow down currency depreciation, although it is unclear how big the effect actually is. In any case, energy costs are falling again to a somewhat more moderate level for other reasons. Together with the numerous state measures – from value added tax reductions to the gas price cap to the assumption of ancillary housing costs in December 2023 – the current monetary policy is causing inflation rates to stabilize in the single-digit range.
The days of double-digit inflation rates therefore seem to be over for the time being, but inflation of between 5 and 9 percent – the federal government is currently assuming 6 percent for the year as a whole – will probably also accompany us in the current year. The ECB will therefore continue to raise interest rates and has already confirmed this for March. So there’s a lot to be said for it now cheap loans to research and not to wait for a further rise in interest rates.
What is currently to be considered?
A loan is not the solution, or at least only in very rare cases, for expenses that permanently exceed income. Loans should not be used to purchase things that one cannot actually afford. However, there are personal situations and goals that can only be managed with the help of a loan. Buying real estate and motor vehicles, entrepreneurial investments or debt restructuring are widely accepted reasons for taking out a loan.
In addition to the right reasons for taking out a bank loan, the economic conditions should also be right for borrowing to make sense. In addition to the usual considerations and calculations, the special conditions of inflation should also be included in the calculation.
credit and inflation
The currently high inflation affects borrowers in several ways: On the one hand, as already mentioned, the interest rates on loans also rise, which makes loans more expensive. This means that with the same income, borrowers can only afford lower loan amounts because the monthly installments are higher. Secondly, this also applies to customers with existing loans that are no longer subject to fixed interest rates and are now being offered higher, customary market interest rates.
Anyone who took out a loan with fixed debit or nominal interest rates when interest rates were low can count themselves lucky. This now protects against interest rate increases that sometimes threaten the existence of the company. Anyone who is now affected by rising interest rates with a current loan should check whether there are cheaper options for debt restructuring or combining several loans or whether the interest burden can be reduced by special repayments or an increase in the monthly repayment installments.
What does this mean for taking out new loans?
Anyone who takes out a loan now has to pay higher interest rates than in previous years. Locking in a low borrowing rate for a long time is no longer an option. Furthermore, the ECB announced that raise interest rates further and the American Federal Reserve also raised its key interest rate in February for the eighth time in a row to 4.75 percent.
It is therefore quite possible that loans will become more and more expensive as the year progresses and now is a good time to take out a loan. However, how long one should leave interest rates fixed at present is a difficult question, because it is extremely difficult to look into the future of monetary policy since too many economic factors are currently uncertain.
In principle, one should pay attention to longer fixed interest rates for higher loan amounts, because otherwise there are considerable risks of over-indebtedness. For relatively low consumer loans or medium-high loans, for example for a car purchase, the consideration could be different, because a return to a lower interest rate level can be expected in the medium term.
In the economic situation we are currently in, forecasts that look more than half a year into the future should be treated with extreme caution. Therefore, this difficult economic environment speaks in favor of a loan with the most flexible conditions possible.
minimize risk
In order to minimize the risk of financial disadvantages from the development of the next few years, one should tend to
- rely on short maturities,
- insist on special repayment rights up to the possibility of paying off the entire loan amount and
- set the financial buffer higher than usual.
However, inflation also has good news for borrowers who are now struggling with rising costs: the price increases not only devalue the savings but also the loan amount. If you took out a loan at the beginning of last year, you have – theoretically – already reduced your loan amount by 6-8 percent simply through the depreciation of the currency. However, you can only benefit from this connection in practice if you can also increase your own income by this percentage.
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