The term ‘credit crunch’ means that there is a lack of money available to borrow in the economic system, which in turn means that the cost of borrowing money rises.
When banks lend money to customers, they get this money both from other customers’ savings and from the money market. Banks also borrow money in order to grow their own businesses, but can overstretch themselves by borrowing too much in order to speed up growth, as happened in the well-publicised case of Northern Rock. Risky borrowing – when the ability to repay money in is doubt – is a dangerous business.
Risky lending is problematic too. When a large number of people in the USA failed to repay their mortgages in 2007, a number of American banks lost money as a result, because they were relying on income that never appeared. This meant that there was less money in the market to go around, and banks as far afield as the UK didn’t have as much cash available to lend to their customers.
What effect will this have on me?
The lack of funds available to banks means that they are increasingly careful about lending money to customers. This means that the terms in which they lend money are more restricted, and the amount of money they are prepared to lend has reduced. The number of 100% mortgages has dropped considerably, for example.
The cost of borrowing has also risen, with increased interest rates and fewer deals and discounted rates available. Customers in what the banks call the ‘sub-prime’ category (mainly people with a poor credit history, such as those who have missed repayments on previous loans) may find it particularly difficult to borrow at present.
