There is much being written about the 'credit crunch' but what exactly is it and more importantly what should you be doing in order to minimise its effects? Over the next three weeks we are taking a look at the implications and will be suggesting a few steps you can take to get through these difficult times.
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How To Survive The 'Credit Crunch'
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What is the 'credit crunch'?
It's important that we understand what the 'credit crunch' is as that makes it simpler to think about what can be done to avoid (or at least mitigate) the worst effects.
The so-called 'credit crunch' started with problems in the housing market in the US and stems from mortgage lending to the 'sub prime' market i.e. to people who would previously have been refused credit due to poor credit histories or uncertain incomes. As lenders got a thirst for this type of business, so they relaxed their rules more and more, lending to people who would clearly be unable to meet the monthly commitment and, in many cases, secured on property of questionable value.
As this all started to unravel, with increasing numbers of properties being repossessed, so confidence in the banks started to waiver with the result that many then found it difficult to raise funds in the money markets with which to finance their lending. However, unfortunately this didn't stop with the US banks as many had packaged up their loan books and sold them on to other banks including those in the UK. This meant that the originating lender was not necessarily the one that was left holding the bad debt. Indeed, these debts had been repackaged and sold on so many times that no-one was really sure who was holding what debt or where the bad loans had ended up. The resultant chaos has resulted in a general lack of confidence in the banking sector as a whole meaning that many financial institutions (including those in the UK) are now finding it difficult to raise the necessary capital to fund their lending.
It was this lack of funding that triggered the Northern Rock crisis as suddenly they found it impossible to raise sufficient money to support their loan book meaning they had to ask the Bank of England for help. Northern Rock were particularly affected as they relied too heavily on raising funds from the money markets in proportion to the size of their mortgage book and deposits from their savers. And, they are not the only ones, with other lenders facing similar crises, although thankfully, so far, none as severe.
So, what does this all mean? Well, in a nutshell it means that banks and building societies are reining in their lending. This in turn is leading to a shortage of credit and a tightening of lending terms. We are already seeing plenty of examples of this with some lenders closing their mortgage book to new borrowers completely (First Direct) and some reserving their very best rates for those with the biggest deposits (Nationwide). Others have withdrawn their one hundred percent mortgage range and many have restricted their maximum loan size. In addition to this many of the so-called sub-prime lenders have either closed their doors for the time being or substantially reduced their overall lending volumes..Continued....
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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
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