Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Credit Crunch

What it is:

A credit crunch occurs when loans are very expensive and difficult to obtain.

How it works (Example):

During a credit crunch, lending institutions are limited as to the amount of funds they can use to make loans. Lenders are afraid borrowers will default, and interest rates increase as a way to compensate lenders for this increase in risk.

Why it Matters:

A credit crunch is very undesirable because it can hinder economic recovery and even protract a recession. If business and individuals are unable to get credit just as economic expansion would otherwise take place, the recovery that would otherwise take place will be choked off or even reverse.