Credit Crunch

Credit crunch

A shortage of available credit for businesses and consumers. This situation could arise when lenders are reluctant to lend because of uncertainty of defaults or are willing to lend only at high interest rates thus making it difficult for businesses and consumers to secure credit. The term became popular the financial crisis that began in 2007 when a large number of homeowners either defaulted or were expected to default on mortgages, leading to great stress on the market in which these securitized loans were traded. The ensuing constriction in liquidity caused lenders to cut back on loans resulting in a credit crunch.

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credit crunch

A period during which borrowed funds are difficult to obtain and, even if funds can be found, interest rates are very high. Credit crunches were particularly severe before 1980 when the ceilings on interest rates that financial institutions could pay resulted in a drying up of deposits.

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Credit Crunch

What Does Credit Crunch Mean?

An economic condition characterized by extreme difficulty in obtaining capital. Banks and investors become wary of lending funds to corporations, and that drives up the price of debt products for borrowers.

Investopedia explains Credit Crunch

Credit crunches usually occur during recessions. A credit crunch makes it nearly impossible for companies to borrow money because lenders are scared of bankruptcies or defaults and charge higher interest rates because of that fear. The result is a slowdown in growth that leads to a prolonged recession (or slower recovery), which is compounded as banks hold tight to the banking reserves.

Related Terms:
• Bankruptcy
• Bear Market
• Debt
• Recession
• Subprime Meltdown