The credit crunch: cause and effect

A credit crunch, as we have seen happen across the world in recent times, is where all of a sudden most people find it very hard to get a loan or any form of credit from a financial institution. It can also be when it suddenly becomes much more expensive to get a loan. Most commonly this will happen because of major uncertainty in the financial market or a drop in the value of the security that financial institutions use to issue the loans.

The credit crunch we are experiencing is believed to have been caused by the ill-judged lending of financial institutions. Primarily the sub-prime mortgage market is thought to be to blame. What is the sub-prime mortgage market though and what exactly happened?

Over the past few years many financial institutions loaned a large amount of money to people who were considered to be sub-prime – people who are at greater risk of not paying the loan back. The accepted reason as to why this occurred is that because the economy was strong, and the financial institutions were making large profits, they felt they could take on a little extra risk. The problem is that they did not foresee how many of these sub-prime loans were going to default. These defaults have left many financial institutions in a great deal of debt. As a result, they are now trying to reclaim as much of that debt as possible, and are greatly tightening their lending criteria.

The credit crunch, coupled with sharply rising prices of fuel, food, housing and basic utilities, has led to much discussion in the media about the possibility of a recession. A recession is a time of general economic decline and could ultimately see a lot of businesses losing money, and having to cut down on the number of employees. It is likely that during a recession, the cost of living will rise even more and it will be even more difficult to borrow money if you need to.

Luckily, there are still ways to be able to borrow money, if you really need to. One of the safest options would be a secured loan. A secured loan is where you provide your own security, such as your home, to help guarantee that the loan will be repaid, even if you can’t keep up with the monthly repayments. Financial institutions are always much more willing to lend money if they don’t have to take on the risk that the loan might not be repaid in full.

Nobody knows how long the current credit crunch will last, or if it will result in a recession. One of the safest things you can do to relieve the pressure of the credit crunch is to watch what you spend by setting up a monthly budget, which can be easily done using most spreadsheet packages.

With a clear indication of where your money is going, you will find you are much better suited to deal with any unpredicted financial fluctuations.

Paul McIndoe writes for a digital marketing agency. This article has been commissioned by a client of said agency. This article is not designed to promote, but should be considered professional content.