Inflation and Lending

Do lenders usually take inflation into account while creating offers and underwriting loans?

Yes. Inflation is taken into consideration via the risk-free interest rate.

Lending rates are based on the risk-free interest rate (government bond rate) for the expected period of the loan (eg. Housing loan pricing will take into account interest rates for multiple years while a gold loan pricing will be based on interest rates for a much shorter period) coupled with other factors including operational costs, cost of defaults and profit margin for the lender.

In some segments like housing loans, the risk-free interest rate accounts for a majority of the interest rate that the consumer sees.

For segments like a consumer durable loan or a micro-finance loan, the risk-free interest rate is a small component of the final interest rate.

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