We’ve all heard the term “credit crunch” bandied about over the last couple of years, but what does it really mean?
Basically, the credit crunch refers to the current lack of availability of credit, be it in the form of personal loans, credit cards or mortgages. Banks and lenders have tightened their criteria to the extent that all but the most credit-worthy individuals are finding it increasingly difficult to borrow money. This has had a huge impact on businesses as well as individuals, given that access to credit is a key driver of growth.
Economists will argue over the different causes of the current economic downturn, but it is an undeniable fact that lenders did not always take the necessary steps to ensure that those who were borrowing money had the means to pay it back. When this led to a huge mountain of toxic debt, panic set in and the whole economic landscape changed almost overnight.
So did we have it all too easy during the boom years? I would certainly say that this is the case. Banks were falling over themselves to lend us as much money as we wanted. No deposit for a house? No problem – just take out a personal loan or borrow more than the value of the house to kit it out with your favourite luxury items. After all, house prices only go up, don’t they?
You see, that’s the problem with this economic mess – many people have short memories, including those bankers who failed to see the perfect storm brewing. It seems that if we’re going to avoid the boom and bust economy in the future, we’re going to have to learn from past mistakes and take a much longer-term view of our finances.
A small but sizeable number of people have profited from the current misery, but for many of us it has given us cause for alarm, due to job uncertainty or worse, unemployment and the prospect of debt. There is a distinct lack of options now available to us at a time when we need access to credit, be it for a mortgage, personal expenditure or to consolidate existing debts.
Which group of people have been particularly hardest hit by this economic crisis? To start with, many of the self-employed would have been affected by this problem. Small businesses have been hit by the lack of available credit and these types of businesses are less likely to have the cash reserves necessary to weather the shock. Those who have managed to borrow money have found that they have had to pay a much larger rate of interest than they would have done prior to the contraction of lending.
Another reason why the self-employed may be suffering the most is due to the virtual elimination of self-certification mortgages. These were commonplace pre 2008 and allowed people to make a declaration of their income in order to obtain a mortgage without having to provide proof of income, which can be particularly difficult if you have more than one income stream. It is more important than ever for those who are self-employed to gain a better understanding of what credit is available to them and how they can obtain this credit.
There are millions of people in the UK who are currently struggling with their finances. With banks not wishing to lend to those who need it the most, anyone who has a poor credit rating or is struggling with debt really needs to know their options when it comes to obtaining credit.
Arming yourself with knowledge is key to surviving the credit crunch, as there are many companies and lenders who prey on the weak to bolster their profits. There are now a plethora of options available to those who are struggling with their finances, but what may seem like an easy way out isn’t always the best solution.
If you do have an adverse credit history due to defaulting on repayments, you will need to know what your options are, given that you can’t just walk into the bank and ask for credit like you may have been able to in the past. Your options are now somewhat restricted, but that doesn’t mean that you should just give up, as there are still many lenders who will offer credit to people with less than perfect credit ratings.
Anyone who has bought their first home in the last five years may also need access to better information on credit. Getting on the housing ladder over the past few years has been a struggle for most, given the high cost of houses relative to income. Lenders offered particularly attractive deals to those looking to take out their first mortgage, but when these deals come to an end, buyers are typically put onto a standard variable rate, which can be significantly higher than any discounted rate they may have had initially.
Getting a good deal when your introductory rate comes to an end could prove to be tricky, given the tightening of mortgage lending. Anyone without a large amount of equity in their house may struggle to switch to a comparable rate.
The whole financial landscape has changed and may not return to normal levels for the foreseeable future. We have witnessed the proliferation of companies who claim to wipe out people’s debt, but it may not be as easy is they lead us to believe, so we must do a little digging to figure out which options are best for our circumstances.
To sum up, the credit crunch has had a huge impact on people’s ability to borrow money and those at particular risk are the self-employed, first-time buyers and people with poor credit ratings. If this has affected you then the best option would be to arm yourself with knowledge as there are many money saving tips and tricks you could employ to save yourself money, whether it be choosing between a balance transfer or a loan, getting the right help to get your out of debt, or simply knowing which options are now available to you.
This article was sponsored by Capital One as part of their ‘Credit Made Clearer’ initiative, helping people dispel the myths and understand the jargon concerning credit and finance. Find out more at http://www.capitalone.co.uk/creditmadeclearer.
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