Economic stability is based on the balance of inflation and deflation. Let’s see how loans balance the two sides of coins.
How loans control inflation?
Inflation is the state in which the government increases the prices of goods thus making many luxury items less accessible. When the purchasing price of common items is increased, lenders tend to enhance the interest rates. The existing customers would have to pay higher interest rates to ensure the cash flow in the economy and the people who are trying to get the loan would have to secure more deposit to get the loan. This instills the fashion of savings and keeps the economy fine.
How loans control deflation?
In case of deflation, the goods get cheaper and it becomes easier to access every other item. But it can cause worse effects on the government and the producers. If the cost price remains higher than the selling price all the time, sooner the production will decrease and it will hang the country dry. To overcome this situation interest rates are decreased, more people bid for the loans and this develops a trend of spending. That ultimately does not stop the cash flow in the economy and make it healthy.