Inflation, in absolute terms, is a larger benefit to people with higher interest rates.
Fair enough. I’m more thinking in a discrete sense… “saving money” versus “owing money”… rather than implicitly how much less are you paying.
Comment on Uber Eats or something idk
NateNate60@lemmy.world 3 weeks agoYour maths is not right. Inflation, in absolute terms, is a larger benefit to people with higher interest rates.
Let’s consider the scenario where inflation is 10% for simplicity, and two borrowers who each borrow $100, but Borrower A at 5% annual simple interest and Borrower B at 25% annual simple interest. Both borrowers borrow the money at the beginning of Year 0.
Borrower A owes $105 in Year 1 dollars at the beginning of Year 1. This is equivalent to $95.45 in Year 0 dollars.
Borrower B owes $125 in Year 1 dollars at the beginning of Year 1. This is equivalent to $113.64 in Year 0 dollars.
Compared to a 0% inflation rate, Borrower A saved 9.55 Year 0 dollars and Borrower B saved 11.36 Year 0 dollars. Borrower B saved 1.81 more Year 0 dollars than Borrower B due to inflation (but paid 17.55 Year 0 dollars more overall because of interest).
UnderpantsWeevil@lemmy.world 3 weeks ago
Trainguyrom@reddthat.com 3 weeks ago
Actually its the inverse. Borrower A is borrowing the equivalent of $105 and borrower B is borrowing the equivalent of $125 and after 5 years the amount they borrowed is equivalent to $160.
Let’s put this into more real terms. Lets say 30 years ago borrower C got a $100k mortgage at a 6% interest rate. Ignoring everything else that often gets lumped into “the house payment” (insurance, property taxes, HOA/condo association fees, closing fees, etc.) their monthly mortgage payment would be $599.55 for the entire lifetime of that mortgage. That $100k in 1995 dollars that was borrowed would be about $210k when adjusted for inflation. Those 360 payments would also conveniently equal out to roughly $215k meaning they effectively were loaned the money for free over the timescale, and that loan payment of $600 in 1995 is still a loan payment of $600 in 2025 despite the fact that that $600 in 1995 dollars is equivalent to about $1200 today.
Basically with inflation, property ownership ensures a roughly decreasing cost of living over a lifetime and property has a tendency to gain value faster than a dollar does, so ultimately being able to get a mortgage creates wealth for the individual by stabilizing costs that would otherwise grow indefinitely and they gain an asset that generally increases in value.
NateNate60@lemmy.world 3 weeks ago
I’m a bit confused by what you’re trying to say here. It seems non sequitur if you are trying to say “borrowers of higher interest rate benefit less from inflation”.
Trainguyrom@reddthat.com 3 weeks ago
I wasn’t the one who said that part. I just wanted to correct the simplified math with some real world numbers that put into perspective how much wealth just being able to get a mortgage sets one up for
NateNate60@lemmy.world 3 weeks ago
So what did you mean when you began your comment with “actually it’s the inverse”? Inverse of what?