What Does The Credit Crunch Mean For Personal Loans?
You’ve doubtless seen the media coverage of the so-called credit crunch that has had the economists and bankers worried over the past 5 years stemming from the 2008 near banking collapse. Several large banks failed and many smaller banks failed causing many consumers to lose money as well if their investments were not protected. The Federal Government in several countries had to prop up the banking system so that more banks would not fail and then had to initiate a funding program to get the economy moving again. They found that many lenders would only lend money under very strict conditions which essentially caused a credit crunch for personal loans and mortgages for both business and consumers.
Consumers are Affected Too by the Credit Crunch
It’s not just an issue affecting the arcane world of high finance; it has had consequences for those wishing to take out a personal loans and mortgages too as well as business people who are trying to run their business and need operating loans. In fact at one point it in the 2010 period it was so bad that practically no one could get a loan for any kind of reason, unless they had perfect credit. This was a significant credit crunch for consumers and for business people. It virtually brought the economy to a standstill and could have brought the economy into another recession that might have been worse than the great recession in the 1930’s. No one could obtain personal loans for anything and when people are not borrowing, they are not spending and business is not selling. People get laid off since there is no work for them and it just gets worse from there.
Even today in 2012 and heading into 2013, the credit crunch is still alive and well. Many people have difficulty finding lenders that will lend them money for personal loans and for mortgages. Banks and lenders must meet new rules established by the government that has the effect of making less money available to consumers and businesses for loans. The restrictions are aimed at preventing another banking credit crunch and endangering the banking system. Prior to 2008, loans and credit in general were very easy to come by. You could get a credit card with no problem what so ever even if you did not have any income. The same thing applied to personal loans. As a result many people defaulted on their personal loans and credit cards making the credit crunch even worse. The housing crisis was brought on by this easy money approach.
What are the Banks Doing Today About Personal Loans and the Credit Crunch
The banks must maintain larger reserves than they did in the past to ensure that they can withstand any financial strain. That means there is less money available to lend out to consumers and business people. These reserves are held in vaults and are available should there be a run on the banks for whatever reason. If people suddenly get nervous about a bank or the banking system in general, they tend to remove their money from their accounts and the banks must have funds to deal with this mass withdrawal. If they cannot meet the cash flow, they risk going insolvent and making matters much worse for everyone, hence the larger reserve requirement.
In addition after the fiasco of the junk mortgage scandal and the associated bank failures, the near bank failures with the government supporting some of the banks, they are all being much more conservative when it comes to lending. The impact on the consumer and businesses is that unless you have near perfect or perfect credit ratings, it is even more difficult to be approved for a loan or a mortgage. With interest rates at historic lows, some people are taking advantage of their perfect credit score and borrowing money in personal loans and mortgages to finance all kinds of initiatives. Whether it is a new car or renovations or a trip, those people with good to excellent credit scores are benefitting from the low rates.
In Canada they have eliminated long term mortgages. Now in Canada, you can only be approved for a 25 year mortgage. In the US longer term mortgages are still available, but the credit ratings have been tightened as we mentioned. A 25 year mortgage means a larger monthly payment and also a larger down payment in many cases, making it more difficult for many people to qualify for a mortgage.
The impact of this approach is that monthly payments will be larger. If you cannot spread the payments over a longer term, you still have to pay off the mortgage in less time now that it is a maximum of 25 years. Monthly payments are larger as a result and more people have difficulty in meeting this requirement.
Lenders typically will use a factor of 35% as their cutoff for approving borrowers. This means that all of your payments for loans and mortgages, plus taxes on your home must be equal to or less than 35% of your total monthly income. As monthly payments increase, this becomes more difficult for many consumers. The credit crunch has really impacted consumers planning to borrow personal loans and mortgages for homes in this manner.
Another part of the credit crunch which has not really hit us yet is the potential for interest rate increases. Both Canadian and US governments have kept the prevailing bank rate low for the past 5 years in an effort to stimulate the economy.
Many people have taken mortgages at these low rates and are at their financial limits in terms of what they can afford. Once interest rates begin to rise, loan and mortgage monthly payments will also rise as well making it more difficult for consumers to meet their payments. Currently as we are writing this post, interest rates are forecasted to rise near the end of 2013 or early 2014. This rise in interest rates will put many consumers in jeopardy from a debt ratio perspective and we may see another cooling of the housing industry and defaults and foreclosure rise once again. Hopefully this will not result in a new credit crunch for the economy and cause another slow down with the corresponding loss of jobs.
The impacts of the credit crunch on personal loans are not yet over! Manage your money carefully in this new credit crunch and qualify for personal loans.