How a Recession Can Affect Your Personal Loan Application

Your personal loan application will be subject to higher standards in a recession. It is easy to think that the global credit market will not affect your loan application, but the opposite is true. The credit market at large will always have an impact on individual borrowers, regardless of credit. You can minimize the impact of a bad market by preparing your application accordingly.

Less Loans Available

During a recession, banks and lenders have less cash to lend. This occurs when large customers and small customers alike begin defaulting on their loans. Nearly all businesses and households operate on debt, including the federal government. They seek loans in order to expand and secure future profits, and then they pay the loans back once the profits have been secured. When these borrowers cannot make the anticipated profit, they cannot pay off the loans.

Banks and lenders are left in a bad position. They, too, usually have loans to pay off. As they look to pay off loans and save money where possible, they do not have as much cash to extend new loans. The first loans to go tend to be the low-end personal loans that do not generate much income for the bank and carry a higher risk of default. Because there are less personal loans being extended, an applicant needs to truly shine in order to achieve personal loan approval. This means an application should be diligently prepared, lacking no information, and presented in the most professional way possible. 

Lower Limits

Again, banks and lenders simply do not have the cash to extend large loans in times of recession. For example, jumbo loans are the first things to go in most real estate recessions. Jumbo loans are those loans that are larger than the standard set nationally. They are easier to secure in a boom economy, and at times have even been handed out freely. When the cash gets tight, banks and lenders extend much smaller portions of money.

Understanding that limits are reduced means you should apply for a loan in-line with both what your needs and your financial strength call for. If you need a car, applying for a $70,000 loan for a luxury vehicle may not be an option. It is a better idea to apply for a loan for a mid-range automobile that will suit your transportation needs for the time being. The same goes for personal loans. Determine how much you actually need in order to cover the expense, and look to secure a loan only slightly larger than this amount. 

Risk is Undesirable

Lenders do not want to involve themselves in risky loans in an unsure market. Recessions affect those people with low credit scores and low income to a higher degree because of the inherent risk involved in extending credit their way. If your credit is not up to par, it will be necessary to secure your loan against an asset. Opting for a secure loan will expedite the approval of your personal loan application in most cases. You can place a car, home or even stock down as collateral.  A secure loan will also be less expensive due to lower interest rates.

 

 


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