question about debt

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yoshhash's picture
yoshhash
Status: Martenson Brigade Member (Offline)
Joined: Sep 20 2008
Posts: 271
question about debt

Ok, here is another question that some of you may find incredibly dumb, but if I can`t be blunt in seeking answers here, where can I, rightÉ

I understand the need to get out of debt.  However, I seem to have misunderstood what happens to the principal amounts owing in the advent of hyper-inflation or similar collapse type scenarios.  Supposing you owed $10,000 towards student loans, then an outright and sudden collapse occurs, and a loaf of bread becomes worth $10,000.  I thought that as hard as cash would be to come by, I still would only owe $10,000- the equivalent of a loaf of bread.  Was I wrong on this pointÉ  Does the principle amount get adjusted according to the inflation, becoming a multiple of hundreds or thousandsÉ 

propamanda's picture
propamanda
Status: Bronze Member (Offline)
Joined: Sep 17 2008
Posts: 61
Re: question about debt

No way.

If you owe $10,000 now, you will still owe $10,000 regardless of what happens with inflation. 

Your loan company cannot "adjust" for inflation and suddenly say you own more money as a result.

If our dollar falls so low that a loaf of bread costs $10,000 and you still owe your loan company that $10,000 as well, you can pretty much hand them that loaf of bread and have it paid off.

 Amanda

britinbe's picture
britinbe
Status: Gold Member (Offline)
Joined: Dec 28 2008
Posts: 381
Re: question about debt

plus what ever interest is owing.  If hyperinflation takes hold like that then interest rates will be very high as well.

Britinbe

bearing01's picture
bearing01
Status: Silver Member (Offline)
Joined: Sep 8 2008
Posts: 153
Re: question about debt

If your student loan has a variable interest rate then the rate, and your payments, will change with inflation.  If we were to go hyper-inflation then interest rates could go to 100% or more and you'll be paying much more.  The principal won't change.

yoshhash's picture
yoshhash
Status: Martenson Brigade Member (Offline)
Joined: Sep 20 2008
Posts: 271
Re: question about debt

Ok, thank you all for the prompt responses.  This is good news- my debt is manageable, I will be ok.

Brainless's picture
Brainless
Status: Silver Member (Offline)
Joined: Dec 9 2008
Posts: 150
Re: question about debt

For this among other reasons i buy gold. It does not have to be much but in a worse cased scenario you can at least get out of debt quick. Don't be surprised if the interest on your loan will go up astronomically, compensating for the inflation.

My mortgage of around 200.000 euro will be unpayable when interest rates go up to 10% or higher. It is locked for ten years but after that, who knows. Gold will at least protect against high inflation and with that high interest rates.

If you worry about your student loan, buying maybe 1 ounce could already be enough to protect you against the loan.

 

propamanda's picture
propamanda
Status: Bronze Member (Offline)
Joined: Sep 17 2008
Posts: 61
Re: question about debt

Yes - if you have a variable interest rate, you could owe a lot more in interest. 

I was assuming the question pertained only to the amount of principal you would owe:

 "Does the principle amount get adjusted according to the inflation, becoming a multiple of hundreds or thousandsÉ" 

 

yoshhash's picture
yoshhash
Status: Martenson Brigade Member (Offline)
Joined: Sep 20 2008
Posts: 271
Re: question about debt

Well, for the record, I was referring mostly to the principal, but I know I will have to keep a wary eye on interest as the road gets bumpy.  Buying gold or anything is out of the question for me, I would have to get a loan to do so, which would be counter to the whole gameplan.  I am almost done my thesis and so I'm chomping at the bit to get out and make some money to pay the loan down.  (If there is one thing my wife and I excell at, it is living frugally- our electricity bill is always under 200 kwh/month, just for example.)  I think I can pay down most of my loan (about $50,000) within a couple of years.  If things get really crazy, I am fortunate enough to have parents who would pay off the loan.

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