The Credit Crunch What Does It Mean To You.
Go to: Article Next Article
The aim of this article is to define the credit crunch and explain how it may have an affect on you as a borrower.
Although it is compiled with the UK market in mind, due to similarities between the different countries within the European and world markets, the effect it may have on the individuals within these markets will likewise be similar.
So what exactly is the definition of the credit crunch? As many people may already be aware, the credit crunch started in the United States. It's arrival was principally caused by two factors. The first was the methods employed by companies when lending money to borrowers and the second factor dealt with how these companies went about obtaining the finance for these loans in the first place.
Most lenders lend money they don't have, now of course they can't lend money they don't actually have but they can lend money that is not exactly their own. A lot of lenders lend what is called securitised money this is where they borrow money from another source and then lend it to you and I.
Securitised money is generally sourced from what is known as the money markets. Lenders basically go to these money markets and borrow vast amounts of money at a time, millions in some cases. The amount that they borrow in any one time is also known as a tranch of money.
Once that tranch of money has been lent to borrowers, they then set about borrowing more but what has already been lent is known as a lending book. That lending book has a value to institutional investors. Institutional investors are people such as pension companies or large investors who want to own loans lent to others that are going to be repaid but don't want to go through the hassle of actually lending it in the first place and dealing with the end user. Lending books depending on their quality can have quite a high value.
It is the quality of these lending books that plays such an important role as to why we have a credit crunch at all. Ideally, a lending company would obtain a tranch of money for lending at a set rate. They would then lend this money to their borrowers at a percentage higher than that, and would therefore be making a profit. However, there are two significant possibilities which can ruin this ideal situation.
The first is if the secondary lender lends poor quality money to the public. That is to say that some or all of that money has not been paid back and so is not effectively there to lend. The other possibility is if the money being distributed by the primary lenders, the distributors of the tranches of money, runs out.
Both these events have taken place in the US. Secondary lenders have lent to poorer quality borrowers and as such have ended up with bad debts and in addition primarily because of the first situation the lenders that lend the huge sums to the secondary lenders have pulled out of the market.
This has left the secondary lenders with no means to raise more money to lend but also they are finding it increasingly harder to sell on their mortgage books, once completed, as they carry such bad paying customers and are deemed poor quality lending books. Poor quality lending books carry a lower value to institutional investors due to the fact that they could lose money.
This whole situation has affected the UK in so much as some of our major lenders use securitised lending as their main source of business and even though in the UK we are very much more conservative in our lending practises the international money markets still don't want to lend the amounts they once use to.
This whole situation has left the UK lending industry in significant turmoil and some of our major institutions on the brink of collapse. This in turn affects every singly borrower such as you and me as lenders tighten up their lending criteria even more to ensure that their respective lending books stay as clean as they can be.
Article Source: Articlelogy.com
- Credit Cards A big selection of Cards in all flavors: Bad Credit Cards, Secured Cards, Prepaid Cards, Canada Cards, Low Interest Cards -
Word Count: 717
Reduce Your Debts Without Bankruptcy. See How Much You Can Save. Free Debt Analysis
