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Know your rights when making payments in Europe.
Do you know what the gross domestic product is? What about inflation? (only in Portuguese)
Key tips to protect yourself when choosing online or mobile banking services.
Inflation affects household budgets in multiple ways. Inflation has a direct impact on expenses and the real value of income and savings.
High inflation leads the European Central Bank (ECB) to increase official interest rates, resulting in banks raising their interest rates and in a higher cost of credit for households.
In an inflationary environment, goods and services become more expensive and the value of households’ spending tends to increase. To buy the same basket of goods and services, households must spend more money.
However, if prices for goods and services increase, households start buying a lesser quantity of goods and services with the same income. In other words, the real value (purchasing power) of income decreases.
In an inflationary context, if the increase in household income is lower than that in the prices of goods and services (inflation), their real income (purchasing power) decreases.
Inflation does not impact everyone in the same way. The impact of inflation on the budget of a given household depends on the basket of goods and services consumed by it monthly and on the worsening of the prices of those goods and services.
In a context of rising expenses and a drop in real income due to inflation, it is important to:
Rising inflation prompts an increase in expenses and a decrease in the real value of income, making it harder to balance a budget.
It is important to review the household budget and assess:
When reassessing spending within the household budget, it is important to consider the difference between:
When reassessing spending, it is also important to acknowledge that there are:
You may also consider reusing, restoring or sharing products, which can prolong their life cycle and prevent spending. These and other circular economy practices can contribute to the improvement of the household budget and to environmental sustainability.
Not paying certain expenses on time, such as water, electricity, gas and communications bills, may lead to further expenses due to contractual penalties (including default interest) and, in more severe situations, to a cut in the provision of those services.
Late payment of credit instalments also has its consequences: you become subject to the payment of default interest and other charges that add to your debt, and the credit institution may initiate judicial proceedings to recover the credit, which may lead to the lawful seizure of your income and the sale of your assets. If you are in arrears, ask your institution how you may overcome this situation and if you have been integrated into the out-of-court arrears settlement procedure (OASP).
If you think you will not be able to pay one of your bills, contact your service-providing entity as soon as you can so that, together, you can find a solution. Alert your financial institution if you are at risk of defaulting your credit instalments. If you do, the institution must provide you with a document describing your rights and duties and give you contact details to receive communications under the pre-arrears action plan (PRAP).
In a context of rising inflation, it is more difficult to balance a budget and save part of your income.
Even if households can maintain the same level of savings (nominal), the real value of those savings diminish as prices increase. This means that the same amount saved will allow you to buy fewer goods and services in the future.
If savings are put away, for instance, in a savings account, the rise in inflation will decrease the interest obtained in real terms when that deposit matures.
In an inflationary environment, it is important to:
If possible, take another look at your household budget to, at least, keep meeting the monthly savings amount.
If it is possible, increase the amount saved in nominal terms, to maintain the value of those savings in real terms.
Investing savings in a financial product is even more important in an inflationary context, so that the remuneration earned (for example, interest in a time deposit) offsets the loss in real value of the saved amounts.
So as not to lose value, savings will have to earn a positive or nil real interest rate. The real interest rate is the difference between the nominal interest rate and the inflation rate. If the interest rate of the savings investment is lower than the inflation rate, savings lose value in real terms.
When there are savings available, you should consider using them to repay your loans and, therefore, decrease credit expenses. If you are considering a repayment, know that until 31 December 2023 you are exempt from paying the early repayment fee, whether it be a partial or full repayment, in credit agreements for the acquisition or construction of permanent residential property with a variable interest rate.
Periods of high inflation are, as a rule, accompanied by increases in interest rates and, consequently, by higher costs of credit.
One of the main instruments used by the ECB to reduce inflation is the increase in official interest rates. This raise results in an increase in the Euribor, the reference rate for loans with a variable rate, as are most home loan agreements.
In loans with a variable rate, the interest rate results from the sum of the average value of Euribor (reference rate) with a spread fixed at the beginning of the agreement. When the Euribor rises, so do the interest rates of loans with a variable rate and, therefore the value of instalments to pay for that credit.
For households with loans with a variable rate (for example, home loans), an increase in interest rates means an increase in expenses on the monthly budget. In this context, if the household does not have any savings or cannot readjust its monthly budget, it may run the risk of missing the payment of its loans.
If your credit costs increase, it is important to:
Assess the impact of the increase in interest rates on your credit instalments and if you can continue paying these instalments or if it is necessary to readjust your monthly budget.
In this assessment, consider your present and future income, (the other) expenses in your household budget and savings you might have at your disposal if you need to fall back on them.
To assess the impact of the increase in interest rates on loan instalments, use the mortgage credit simulator or the consumer credit simulator available on this website, or ask your credit institution for a simulation.
In a context of rising interest rates, consider if taking on new credit is really necessary.
The instalments of a new loan will raise the fixed costs of all future monthly budgets until the maturity of that credit is reached, reducing the budget’s margin to accommodate other expenses.
Avoid taking out new loans to pay existing credit instalments. This practice may bring you some financial relief, but that relief will only be temporary because your debt will increase and so will the associated costs.
In a situation where there is risk of default, it is important to:
If you are having difficulty with paying your credit instalments, inform, at once, the institution that granted you credit. Institutions should assess, at least once a month, their customers’ financial situation and contact them if any signs of risk of default are detected.
In these cases, the financial institution must implement the pre-arrears action plan (PRAP) and provide the customer with a document describing their rights and duties.
The institution should assess the ability of the customer to pay their loans and, if it concludes the customer has the means to avoid default, it should propose payment solutions that are well-suited to their financial situation, goals and needs.
If you have retirement, education and retirement/education savings plans, you can redeem them early until 31 December 2023.
You can use the funds redeemed from the savings plans under this transitional regime to pay off instalments from credit agreements for the purchase of permanent residential property.
If you are in arrears, ask the institution how you may overcome this situation and if you have been integrated into the out-of-court arrears settlement procedure (OASP).
The OASP is a procedure that makes it possible for customer and credit institution to negotiate solutions for the settlement of arrears, avoiding recourse to the courts.
After their integration in the OASP, the customer has the right to receive a document with information on their rights and obligations under this procedure.
The credit institution should assess the customer’s situation and propose, where viable, solutions that are well-suited to their current financial situation, goals and needs.
During negotiation, the law gives the customer a set of guarantees. The credit institution is not allowed to terminate the credit agreement, promote legal action against the bank customer to recover the credit or transfer the credit to other institutions.
Bank customers in risk of default or in arrears can obtain, free of charge, information, advice and assistance from the entities that are part of the Bank Customer Support Network.
EBA’s website > How do inflation and the rise in interest rates affect my money?
EBA’s website > ESAs draw consumers’ attention to how rises in inflation and interest rates might affect their finances
Inflation > What it is
Inflation > The importance of price stability
Credit > Managing debts > Arrears prevention
Credit > Managing debts > Impact of interest rate rises
Credit > Managing debts > Arrears management