After the recent economic downturn in USA, for which the primary reason was sub-prime credit crisis, most of the world has become very cautious with respect to loans. For example, in UK the home loan rejection rate has increased from 33% to 50% in last six months. Not only this, even the interest rates have skyrocketed for customers with slightly risky profile. On an average the loan rates, have increased by 4% in one month in UK.
In US, the crisis began with housing loan going bust. High housing loan was provided to people with low income and who was not able to repay the loans. In other words, money lent to high-risk borrowers with low repaying abilities caused the start of the economic crisis in US. Soon the borrowers witnessed a situation in which the personal loan quote shot up rapidly.
With the subprime credit crisis the economy was badly affected and it went spiralling downwards. With people unable to repay the mortgage amount, the market had a shortage of money, which could be provided to the genuine borrower. This in turn shot up the interest rates and deprived the genuine borrower of further investments in business. Thus, the consumer spending reduced and hereby drove the economy into a reverse gear. The ripple effect of this downturn was felt all across the globe. In UK, Barclay’s loans services and others made stringent policies for disbursing loans.
However, increasing the loan rate is also an effective way to combat inflation. By increasing the loan rate, the available money in market is restricted and therefore helps in reducing inflation.
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