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Since the latter part of 2007, the credit crunch has driven the agenda on the economy and affected people far beyond those in the finance world. Since it started, economic recessions are expected and hundreds of thousands of jobs have been lost, on top of that, many believe there is more to come.
In order to navigate your way through this credit crunch and ensure minimum impact if any, you need to understand what the credit crunch is and how it is likely to affect you.
What is the credit crunch?
The term refers to the stalemate caused by a shortage in money that banks usually have available to lend to each other, if banks don’t have the money at hand, that means they’re unable to borrow to credit consumers on loans, mortgages and credit cards.
What created this situation in the first place is the practice of banks selling debt to one another; some unscrupulous lenders gave loans to people that could not afford them, these bad loans were mixed with good loans and packaged as safe debt then sold on to other financial institutions who assumed they were safe, as a result, it is unclear which banks have bad loans and what extent.
This lack of clarity is what created the nervousness between banks, no one wants to borrow because they don’t know if the recipient will still be solvent tomorrow.
How it affects you
Although most of the blame lies with unscrupulous lenders who should have known better than to give loans to people who couldn’t afford them, some of the blame has to go to those consumers who clearly took on more debt than they could afford.
It is expected that lenders will take steps to protect themselves, that might mean it will be harder to get credit in the future, in fact, financial experts are predicting that the era of easy money is over; there’ll be no more 100% mortgages, people’s credit ratings will be scrutinised more closely. Some lenders will likely raise the minimum score for lending, thereby hitting the people with low credit scores.
Not only lenders, regulators are also said to be devising measures that will ensure this doesn’t happen again in the future, expect laws that will set some limits on lending, though the intention will be to protect the consumer, they might penalising some people on low incomes or those who can’t prove their income.
There’s hope for consumers however; lenders have to keep bringing in customers in order to stay in business, therefore don’t expect any bank to shut its doors to new borrowers, even regulators want the economy to keep going, whichever new restrictions are put in place, they shouldn’t be stifling to most consumers.
Borrowers with bad credit ratings will have to work a little harder on improving their credit ratings, but even for them, there’ll always be lenders willing to take the risk, though it might be more costly than before.
James B. writes about loans and credit cards, he has written tips on getting a loan with bad credit amongst many other tips.
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