How a Recession Can Affect Personal Loan Lending

Options for personal loan lending will be limited in a recession. Even those individuals with excellent credit cannot assume they are immune to the global and national credit cycles. Seeking a personal loan means you will be competing with more people for less available options. Getting that loan will depend on your ability to understand the credit market and make yourself an appealing candidate.

Less Liquidity in the Market

During recessions, there is less money floating around for the taking. Even banks do not have easy access to cash. This means they cannot extend that cash to consumers in the form of loans. Less liquidity is often the result of more people defaulting on existing loans. It may also be caused by the inability for banks to borrow money from one another. 

Ultimately, less liquidity does not mean banks are not extending personal loans. It does mean there are less personal loans to secure, however. To overcome this, it may be best to seek smaller loans from multiple lenders as opposed to a large line of credit from one lender. Balancing revolving credit, like credit cards, and installment loans, like auto loans, can also give you access to more financing during a slow economy. 

Lower Appetite for Risk

Recessions cause many loan defaults. Personal consumers lose their jobs and are unable to pay off mortgages and auto loans. As businesses close, they are unable to pay off their small business loans or business expansion loans. Banks and lenders end up footing the bill. All of these defaults mean that banks will be very wary about new loans. This was especially true after the 2007 housing crisis, when foreclosures occurred at record rates and banks had a high amount of "toxic debt."

To secure a personal loan when banks are risk averse you should consider using collateral. Securing your loan with collateral will put the onus of risk on you instead of the lender. Autos, homes and businesses can all be used as collateral. This will additionally lower your interest rate. Be aware that you can lose these assets if you default, however. 

Focus on Short-Term Gains

Recessions often cause people to focus on the short-term. Because there is a tight crunch just to stay afloat, banks need immediate influxes of profits in order to continue operating. Very few lenders will be thinking about long-term gains when they are facing immediate needs for cash.

To meet the demand for short-term returns, seek shorter loans and high monthly payments on your personal loan. If you can offer to pay back the loan in full within one to three years, the lender will see there is an immediate opportunity for profit off of your loan. Higher interest rates may be assessed against your personal loan, especially if you have bad credit. However, accepting these high interest rates over a shorter loan may be the answer to securing a loan when banks and lenders are not easily extending financing. 

 

 


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