What Causes A Credit Crunch?

What Causes A Credit Crunch?

1 Answer

  1. Generally, a credit crunch is caused by a sustained period of careless and inappropriate lending which results in losses for lending institutions and investors in debt when the loans turn sour and the full extent of bad debts becomes known. It can happen due to some major causes, like risky loans. Normally, a bank or lending agency would not give out loans to customers who have a low likelihood of paying back the loan. However, the climate among mortgage brokers was such that these so-called sub-prime loans were sold in huge numbers. Companies offered incentives and created consolidation loans to mask the sub-prime risk factor which all made it worse. Easy credit condition and bubble formation can also lead to a credit crunch. If the prices are already rising and in that investors start to speculate than that would again lead to credit crunch.

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