Who Is To Blame For The Credit Crunch?

The credit crunch has affected many lenders, banks and credit card companies as well as the everyday person. The value of debt of the already indebted has increased, and borrowing has become quite expensive for those who are trying to obtain new loans for different purposes. With the onslaught of the credit crunch, the availability of loans has declined by 40% from what it was several months ago. The banks have squeezed their lending criteria, and they are not lending as they were before. The people who have a relatively risky credit record are finding it expensive to get loans from banks. The condition in the UK is not as bad as in the US. The lending is however less, especially in the case of hedge funds. It can be said that the credit crunch presently going on in the UK is quite widespread.

The actual cause of the credit crunch can't be exactly pointed out because the mortgage and credit conditions, especially in the US, indicated that there would be a credit crunch. What actually triggered the present credit crunch was the great number of defaults that occurred on subprime mortgages. The mortgages that were affected were in America, but the after-effects were felt the entire world over, in the form of banks going bankrupt and a shortage of funds taking place due to the subprime mortgage crisis.

Basically, the subprime mortgage crisis was the key factor in the occurrence of the credit crunch. The UK, however, was not as badly affected by the crisis as was the US. The lenders in the UK did not have as many bad mortgages lent as there were in the US. The UK mortgage market was not as badly hit by the crisis because in spite of the relaxed lending there were more controls on the lending as compared to the situation in the US. The brokers and sellers of mortgages were more lax in the US. This resulted in loans being lent to people who did not have the capability to pay them back. And the mortgage companies further sold the subprime mortgages to other finance companies in the form of consolidated mortgage packages. This caused the banks to have the sub prime loans removed from their own balance sheets but it made the other holders of these mortgages suffer when the loans defaulted. The default rate mainly increased because of the increase in the interest rates as a result of inflation.

As a result of the credit crunch, it was not only the mortgage market that suffered but the impact was very widespread and it affected bonds, equities, currencies and many other financial trading. As a result of the credit crunch, there has been an increase of 10% in debts just in the last twelve months. This is because the increase in the interest rates have increased the debt of people, hence making it difficult - and in some cases impossible - to manage. In all these conditions, it has become increasingly important to focus on keeping the debt to a minimum and trying save some money.


Ricardo Reeves is an expert in IVA and has helped hundreds of families free themselves from a stranglehold of debt.