Have you heard people say credit makes the world move? It is a common saying which is similar to the tip of the iceberg. However, there is a lot more to it than just the tip you are seeing. Canada’s national debt reached $1.1 trillion this year, and its growing at a tremendous rate.
The Canadians, in total, own a debt of $2.15 trillion, which is more than the value of Canada’s entire economy. Each year, more people take loans, mortgages, and credit to buy items. Although, it is good for the economy when people start taking more credit.
However, when the same people fail to pay back their debts and more over the value of their underlying assets goes down, it can create a situation of a credit crunch. In this article, we’ll discuss everything bout credit and credit crunch in detail and how it can affect you.
What is a credit crunch?
A credit crunch is a situation in an economy when the money supply suddenly falls short. This often happens when people fail to pay back their loan and the asset they keep as collateral reduces in value.
Although the bank or financial institutions often anticipate these situations, a loss in money can affect their lending status. It can affect the number of loans they will offer to other people.
Credit crunch and recession
As we already discussed, a credit crunch happens when money flow is reduced in the economy. It is somewhat similar to the recession but has a different basis. A recession is when economic activity declines in an economy. For example, when people buy and purchase, taking a long-term or same-day e-transfer loan in Canada creates a lack of money flow within the country and leads to recession.
In both credit crunch and recession, the flow of money decreases. However, the reason for this reduction in both cases is different. And the best part here is that to tackle both credit crunch and recession, the best solution is to reduce the prices and interest rates of goods and services to attract people to take loans, engage in more economic activity, and circulate more money.
By reducing the interest rate, taxes, and prices of goods and services and bringing it to a more genuine and appropriate rate, you can get more people to buy and engage in economic activity.
Effect of the credit crunch and recession on lending
The credit crunch is not a good phase for financial institutions and banks because it cuts their profits, and they must be extremely cautious while providing loans to new borrowers. It is equally difficult for borrowers because a lack of money with credit institutions will become a problematic situation.
So, if you apply for a loan with a bank during a credit crunch, your loan may or may not get approved. So, only if you have a good credit score along with good past credit records will creditors give you a loan. But institutions like PrestoCash do not have the criteria to check credit scores so that you can get an immediate e-transfer loan in Canada from us.
However, the situation is different when it’s a recession. The root difference between credit crunch and recession is why they appear. A credit crunch appears when money flow decreases because of the loss of value of the underlying asset. In contrast, a recession occurs when the interest rates and cost of good increases while a person’s income remains the same.
In this situation, the person will spend more to buy basic items. And when people are occupied with fulfilling their basic needs, they won’t have enough money to spend on other things, which significantly reduces the money flow in the economy.
In a recession, the money is present in the economy only economic activity has reduced, which causes lower demand for goods and services in the market. Whereas in a credit crunch, money loses its original value.
A credit crunch is when credits are low, and a recession is when economic activities are low.
These two situations are different, but if we look from the consumer’s viewpoint. They are a great time to take loans and credits.
How credit crunch and recession will benefit you?
Both of these situations are bad for the economy and its development. But it opens new doors of opportunity for people. So here are the benefits of recession for the consumer.
Decline in prices
- The major and most profound benefit is that the goods and services become cheaper. When a situation like recession or credit crunch strikes, the government tries to boost economic activity by cutting the cost of items.
- And when the cost of goods and services gets lower, it increases the purchasing power of a dollar and gives more freedom to people to buy various things. So taking this time to buy things you love or put money into that investment you have always wanted is the best way to take advantage of a recession or credit crunch.
Lower interest rate
- Another important thing during this time is that the interest rate is reduced. So no matter what type of loan you want, be it a home loan, short-term loan, or a same-day loan in Canada, taking a loan at this time will help you get it at a lower rate.
- However, things can be a little tricky when you are applying for a loan during a credit crunch. But you can still get a loan at a decent interest rate during a crunch.
Balances everyday cost
- Life is all about balance. Isn’t it? As a basic principle of the economy, when demand for anything goes higher, prices increase, and when demand goes down, prices decrease.
- During these times, recession helps balance the over climbing of prices and brings them back to their normal stage. This helps balance out everyday costs and make everything smooth and normal.
Whether you are a business or a consumer, learning about the credit crunch and recession is essential for your finances. However, you do not have to wait for a credit crunch or recession if you need a loan. Lenders are happy to provide you with a loan at a great interest rate when you have a good credit score. But if you don’t, PrestoCash is here to provide you with a same-day e-transfer loan in Canada.