Question

Inflation rate in Indonesia in 2005 was 10.46%. The average inflation rate from 2006-2015 was 6.82%. Did the borrowers who took out 10 year loans in 2005 in Indonesia gain or lose overall versus lenders. Explain your answer.

Answer 1

As inflation increases money becomes less valuable in terms of purchasing power but when inflation rate decreases in future, this means that money has become more valuable in terms of purchasing power and paying back of money during this time means that the person is borrowing money when money has less value and paying when money has more value. The loan amount remains same but the things that could be bought with the same amount when inflation was high would be less than the things that could be bought when inflation is lower means that it was of benefit to lenders as they lended money when it had less purchasing power but are not getting back principal plus interest when money is more valuable and has more purchasing power.

This means that the borrowers overall lose in comparison to the lender who benefitted from the situation.