Anyone paying attention to the news of the economic climate at the moment will undoubtedly have heard numerous references to the credit crunch. Many people, however, will be unaware what exactly this phenomenon refers to and how exactly it affects them. So what exactly is the credit crunch, and how does it affect ordinary people?

In general, a credit crunch is a shortage of funds available for lending, and thus a decline in the availability of loans. Such a situation can occur for a number of reasons, but the credit crunch of recent times is believed by many to have been brought on by the subprime mortgage crisis of 2007, which involved many people in the United States defaulting on their mortgage repayments following the bursting of the US housing bubble. As a result of this crisis, lending between banks began to falter as institutions began to doubt each other's financial viability. Those with poor credit ratings or low income found it much more difficult to obtain a loan or a mortgage in the wake of these developments, with banks reluctant to risk lending money to those who may not be able to repay it. Such a situation can also be known as a "liquidity crisis" or a "credit squeeze". The result of such a situation, where banks are unable or unwilling to lend money, is a general lack of access to money on the part of consumers and businesses.

The most visible manifestation of the credit crunch in the UK was the crisis that engulfed Northern Rock in the latter part of last year. When lending became restricted and the market lost liquidity, Northern Rock found itself facing up to a significant gap in its funds. Unable to borrow the money from elsewhere because of the lack of confidence in the market, the bank had to take the step of asking the Bank of England to bail it out of its difficult situation. Once this news became public, Northern Rock saw its share price crash dramatically. It was eventually nationalised early in 2008. On a different scale, the credit crunch has affected individuals too. The cost of borrowing has continued to rise, and thus it is now significantly harder for ordinary people to obtain a mortgage, and as a result more people are being forced to rent houses.

The credit crunch is not predicted to end any time soon, and it might take a considerable amount of time for people to regain confidence in the markets. If you're looking for information regarding mortgages or other types of loans, Alliance and Leicester have a range of options to choose from.