Investopedia

Continue to Site »

Credit Crisis

Filed Under » , ,
Dictionary Says

Definition of 'Credit Crisis'

A crisis that occurs when several financial institutions issue or are sold high-risk loans that start to default. As borrowers default on their loans, the financial institutions that issued the loans stop receiving payments. This is followed by a period in which financial institutions redefine the riskiness of borrowers, making it difficult for debtors to find creditors.
Investopedia Says

Investopedia explains 'Credit Crisis'

In the case of a credit crisis, banks either do not charge enough interest on loans or pay too much for the securitized loan, or the rating system does not rate the risk of the loans correctly. A crisis occurs when several factors combine in the marketplace, affecting a large number of investors.

For example, banks will charge teaser rates on loans, but when the initial low payments change, they become too high for borrowers to pay. The borrowers default on the loans, and the loan's collateral value simultaneously drops. If enough lending institutions reduce the number of new loans issued, the economy will slow down, making it even harder for other borrowers to pay their loans.

Articles Of Interest

  1.

    Behind The Scenes Of Your Mortgage

    Four major players slice and dice your mortgage in the secondary market.

  2. 5 Signs Of A Credit Crisis

    These indicators can illuminate the depth and severity of problems in the credit markets.

  3. 5 Disastrous Financial Moves We Can't Seem To Avoid

    These money errors are all too common. Make sure you know how to avoid them.

  4. How Interest Rates Affect The Housing Market

    Learn how rate changes can affect home prices and how you can keep up.

  5. 5 "New" Rules For Safe Investing

    Did the credit crisis leave a new landscape for investors? Maybe, but it's not as unfamiliar as you may have imagined.

  6. From Booms To Bailouts: The Banking Crisis Of The 1980s

    The economic environment of the late 1970s and early 1980s created the perfect storm for a banking crisis.

  7. Understanding The Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.

  8. The Bright Side Of The Credit Crisis

    Find out how this tough economic period can be a learning experience for all.

  9. An In-Depth Look At The Credit Crisis

    The credit crisis reshaped the financial landscape and changed Wall Street forever. Find out how it happened.

  10. Why Are Mortgage Rates Increasing?

    Learn how the secondary mortgage market and investor demand affect the cost of home ownership.
comments powered by Disqus
Marketplace
Hot Definitions

  1. Fool In The Shower

    The notion that changes or policies designed to alter the course of the economy should be done slowly, rather than all at once.

  2. Pattern Day Trader

    An SEC designation for traders who trade the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period.

  3. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) due to increases in the cost of wages and raw materials.

  4. Happiness Economics

    The formal academic study of the relationship between individual satisfaction and economic issues, such as employment and wealth.

  5. Affluenza

    A social condition arising from the desire to be more wealthy, successful or to "keep up with the Joneses." Affluenza is symptomatic of a culture that holds up financial success as one of the highest achievements.

  6. Icarus Factor

    The term Icarus factor describes a situation where managers or executives initiate an overly ambitious project which then fails. Fueled by excitement for the project, the executives are unable to reign in their misguided enthusiasm before it is too late to avoid the failure.
Trading Center