I created a calculator that shows the profitability of installment plans or loans considering inflation. In the US, the inflation forecast for the coming years is between 2 to 2.5%. In 2022, for example, it was 8%.
If you follow the link below and enter an amount, the number of months, and zero for an installment plan or something greater than zero for a loan—be it for a house, a phone, or education—in the frame, you’ll see the difference between money paid based on its value today and money calculated based on its value at the end of the period. For instance, if you buy a car for $50,000 on installment over 3 years and there’s an alternative to pay it outright now, the installment saves almost $2,000 if the inflation forecasts (2.5%) match reality. And if inflation shoots up again to 8%, the difference would be as much as $6,000. However, if it’s not an installment but a loan, the higher the rate, the less the interest, of course.
For example, in the case of buying a home for $450,000 with a 30-year loan at 3% and 2.5% inflation, the difference between the money at the end of the period and today reaches $23,714. This raises the question of whether it is beneficial to make a large down payment.
By the way, my house has a fixed rate of 3%, not a variable rate, as is often the case. I bought the house in 2021, so the 8% inflation in 2022 has already affected me. Inflation expectations by the end of 2023 are 4.5%. Nobody offers 3% now; the average mortgage rate is now 7-8%. I figured that just on inflation, savings for the house were about $1,400. Of course, this is good only when income growth accounts for inflation. It was even more on that front when I timed it right when 3% fixed was still possible, but now we’re talking about inflation.
Those who understand economics—is this sound reasoning?
Hi, I'm Rauf Aliev. 