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Why would it be to the borrowers benefit to pay back a loanduring an inflationary period?



Asked by Bradon, Last updated: Oct 18, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Assume i lend you money and i require that you pay me interest in the amount of $100. So instead of spending your $100 on a basket of goods, you have to hand the money over to me. Inflation strikes - prices are rising and wages are rising. Soon, the $100 basket of goods increases to $500. So what used to cost you $100 would now cost $500. The $100 you hand over to me used to buy me $100 worth of goods. The $100 you hand over to me after inflation strikes now buys only one fifth of what it used to. This Really hurts my pocket book. On the flip side, you used to hand over $100 when it bought $100 worth of goods. But now, after inflation strikes, you are still handing over $100 - a sum far lower than what it was once worth. This is a good position for you to be in.

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