How does inflation impact the real cost of a personal loan?

Inflation has a complex impact on the real cost of a personal loan, creating both challenges and opportunities for borrowers in India. As of 2025, this relationship has become particularly relevant with personal loan rates rising from around 12% in early 2024 to 14-15% by mid-2025 due to persistent inflation pressures.

When you have a fixed-rate personal loan, inflation can actually work in your favour over time. The real value of each EMI payment decreases as inflation rises. If you borrowed ₹5 lakh at a fixed rate and your salary increases with inflation, those monthly payments become a smaller portion of your income. This makes the loan progressively more affordable despite the same EMI amount.

Variable-rate loans tell a different story. As the Reserve Bank of India adjusts the repo rate to combat inflation, your EMI can increase. With the repo rate maintained at 6.50% in 2025 due to inflation concerns, borrowers with floating rates have seen their monthly payments rise.

The real interest rate matters more than the nominal rate. If you're paying 14% interest but inflation is running at 4% then your real borrowing cost is closer to 10%. This calculation helps you understand the true expense of your loan.

Consider these factors when planning your loan:

• Your expected income growth over the loan tenure
• Whether you prefer predictable payments or are comfortable with rate fluctuations
• The current inflation outlook and RBI policy direction

Smart borrowers factor in inflation trends when choosing between fixed and variable rates making sure that their loan structure aligns with economic conditions and personal financial goals.