When Does a Credit Crunch Occur?

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A credit crunch occurs when banks stop lending money to consumers as easily or as frequently as in the past. Learn how credit crunches happen when banks increase lending standards or stop lending money to other banks with information from an investment consultant in this free video on credit.

Part of the Video Series: Personal Finance & Money Management
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Video Transcript

Hi, I'm Roger Groh. We're here today to talk about how credit crunches occur. Well a timely topic if you watch the news or read any of the financial papers recently. A credit crunch is simply when banks stop lending and it's very difficult to go as a consumer or as a business to borrow money. There's no other reason to say than that. How do they occur? Well either the bank has made the decision to increase their lending standards so that fewer people qualify today then did in the past or it might be that in turn the bank can no longer go and borrow money to then lend to you. In today's environment it started because the banks were very reluctant to lend to one another and banks lending to one another is what creates liquidity which means that they have cash available to lend to you if you go to apply for a loan. The reason that they, one bank was afraid to lend to another was they're worried about getting paid back because so many banks around the world were going bankrupt. That still exists today and there is a very tight crunch going on. If you go to apply at a car dealership, good luck. If you go to apply for a mortgage, good luck. It's significantly different than let's say 6 months ago and probably in a year it will be back closer to normal. Now in terms of the credit standards going up, they certainly have and that's not such a bad thing but nonetheless the people who lend money to folks that really don't have sufficient cash to pay it back will probably come back into the market as our economy begins to roll again. So credit crunches are pretty simply when banks can't or don't want to lend money to you. I'm Roger Groh.

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