What is a "credit crunch"?

We hear the term "Credit Crunch" often these days, but if you are not currently looking for a loan, you may not be aware what that means and how it affects you.

A "credit crunch" is when banks and lenders have to severely restrict the amount of money that they are willing to lend out. Credit crunches occur for a variety of reasons, but most often a credit crunch occurs when there is a severe amount of debt is accrued by the lenders themselves. One of the reasons for this may be a prolonged period of inappropriate lending, though the current credit crunch is due to the housing market drop which has caused investors to lose a great deal of money. Sometimes it is the investments that these banks and lenders made, but other times it is because the drop in the economy causes people to miss their payments and default on their loans.


Whatever the cause, when these lenders find that they are in debt, they are far less willing to provide loans to others.

This usually results in:

- The only people that can get loans are in the upper tier of credit scores.- Interest rates increase considerably, and loan amounts drop at a similar rate, regardless of collateral.

- Fees can jump as well, even by reputable companies (normally, reputable companies will not have fees).

With lenders short on money to finance others, even individuals with great credit may be forced to take a loan with a higher interest rate than they deserve, simply because credit is so difficult to come by.

How Does This Affect You?

The affects on individuals are twofold. First, even if you have a high credit score that would normally qualify for any loan, you may have problems finding any lender that is willing to take the risk with you. A 700 credit rating starts to look like a 550 credit score to these companies, and although some may be willing to take the risk, they may do so at absurdly high rates.

Similarly, interest rates are far higher making the cost of the loan much higher than it would be normally. And loan amounts are going down, meaning that it may be difficult for you to get the full loan amount you need to make whatever payment needs to be made.

Credit crunches often cause people to foreclose or liquidate their property because they make it far harder for home and business owners to make their payments. Overall, their effect on the economy is such that a credit crunch affects even those that are not in need of a loan.

With the current credit crunch , it is important to save as much money as you can, and if the interest rates drop you will want to immediately refinance and consolidate your loans at a lower interest rate.

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