What is a Credit Crunch?

A credit crunch occurs when loans are very expensive and difficult to obtain.

How Does a Credit Crunch Work?

During a credit crunch, lending institutions are limited as to the amount of funds they can use to make loans. Lenders are afraid borrowers will default, and interest rates increase as a way to compensate lenders for this increase in risk.

Why Does a Credit Crunch Matter?

A credit crunch is very undesirable because it can hinder economic recovery and even protract a recession. If business and individuals are unable to get credit just as economic expansion would otherwise take place, the recovery that would otherwise take place will be choked off or even reverse.