The credit crunch, also known as credit crisis or credit shock, is believed to be brought about by an extended recession. It is an economic condition wherein individuals and corporations experience difficulty in obtaining loans and investment capital. During this time, most banks and lending investors become anxious about loaning money to borrowers. Their fear of financial difficulty and bankruptcy causes a drastic increase in interest rates.  

The lending supply depletes as a consequence of rapid reduction on the availability of independent credit funds. The scarcity on credit availability and the sudden increase on its interest rates affect not only business companies but the country’s economy as a whole.  The consequences of a prolonged recession is said to be the main culprit for the occurrence of a credit crisis.

The instability of a tottering financial market creates doubt to banks and lending companies. The sudden interruption on the regular flow of lending activity takes its toll on companies and businesses which depend on borrowed capitals for survival. The reluctance of banks and lenders to loan money squeezes the remaining funds of companies which eventually may lead to bankruptcy making it harder for them to thrive. When a company has difficulty in surviving their business, the people who works for them would be greatly affected since retrenchments and lay-offs will be inevitable.

The financial stability of a nation’s economy greatly depends on the flow of money within businesses and establishments. Unemployment rate increases as big companies struggle to survive. Affected consumers will then cease from their spending activity as a form of preventive measure to cutback their expenses. The economy continuously suffers as people try to minimize their expenditures. The consumption of goods encompasses a large percentage of economic activity, even a slight discrepancy on the regular flow of financial activity can slow down the economy.

Positive outcomes can also be achieved while the credit crunch is still ongoing. Most people only realize the value of money once they reach a point wherein their monetary funds start to deplete. Hard times usually call for desperate measures. This is when individuals become more aware on the importance of saving money and staying away from unnecessary expenses. Debt accumulation is significantly reduced since consumers are forced to take full control over their finances.

Summary

A credit shock certainly has a lot of negative implications which often lead to more serious financial situations.  At the same time it can also serve as an eye opener to re-evaluate the situations which might have caused it.  Sometimes a big downfall is necessary for a nation to unite as one in order to overcome the crisis and be able to begin with a clean slate. Always remember that success will never be achieved without experiencing defeat.