The Effect of the Financial Crisis on Loans

May 13, 2009 by · Leave a Comment
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The current financial crisis has in some ways caught many persons by surprise and many persons are being greatly affected by its repercussions. The economy is suffering and with persons losing their jobs and business because of the crisis one area will and has certainly gotten a lot of attention is loans.

It is prudent to remember that loans are really a temporary monetary provision that has to be repaid with interest either in full or through monthly installments. When you used the lenders loan calculator maybe the financial crisis was not in full swing but is you where to apply for a loan now chances are the loan calculator would give you a different reading and possibly on that says the same loan will cost more. What is likely to be the effect of the financial crisis on your loan?

Increased interest rates

Currently many lending institutions have increases the interest rates they charge on loan. One report has suggested that a 30 year fixed rate is now standing at just over 6% due to the financial crisis. This in effect will make your monthly mortgage payments go up. Thus most borrowers’ debt to income ratio will rise and that will make most of them unsuitable for a loan which means their application would be rejected by lending institutions.

Stricter loan guidelines.

The financial crisis has brought to light the fact that some people should never have gotten loans in the first place and the bending of the rules to accommodate borrowers has in part led the world to where it is now. Because of this lending institutions have had to revise their rules concerning secured personal loans. Also loan applicants now have to meet the strict guidelines set out by the lender in order to qualify for a loan. This has led to many people no longer qualifying for a loan.

Availability of loan funds

Another problem the financial crisis presents for loans is the availability of funds to lend. Due to the overwhelming amounts of defaults that has occurred over the last two years lenders are not receiving any new money and therefore do not have new funds to lend. Oftentimes the defaulting on loans results in the borrowers assets being sold by the lender at well below premium in an effort to earn some money from the loan.

The financial crisis has caused a slow down if not an almost stop in lending and if lending is done the cost or interest rates are higher than normal. Also the slowdown is attributed to the fact that many potential borrowers are unable to afford a loan hence they do not apply for one. Once they use a loan calculator and see what their monthly installments would likely be, they do not pursue a loan anymore.

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