Easy credit

From CEOpedia | Management online

Easy credit policy is the situation when lending money in the form of very low or negative interest rates is easily available (I. Hussain 2012, p. 36). As John S. Ahlquist and Ben Ansell said: Easy credit has large, positive, immediate, and widely-distributed benefits whereas all the costs lie in the future (J. Ahlquist, B. Ansell 2012, p. 3).

Due to easy credit, consumer debt is increasing because the seemingly infinite access to easy credit is manifested in access to store cards, loans, overdrafts and hire purchase schemes. But, these facilities are not available to everyone. Many people who are the margins of society cannot take advantage of mainstream credit. To finance basic needs such as children's clothes, many people are forced to use a flourishing alternative lending market and solutions such as mail-order catalogs, home credit, tontines and as a last resort unlicensed money lenders (P. Jones 2001, p. 3). For many people such informal lending is useful in getting over financial humps (P. Jones 2001, p. 28).

Disadvantages of easy credit

The huge boom in the global economy was caused by credit was easy to grant and to access. But the price is high. Many people and many businesses face excessive debt (P. Stoop 2009, p. 365). The reasons for this situation are as follows:

  • Convenient access to easy credit can be the cause of many borrowers' financial problems. People with good access to easy credit tend to over-spend and can't cope with and abuse easy credit, so they can't cope with the growing credit card debt (H. Park, L. Burns 2005, p.138).
  • There are cases of people who suffer from enormous debt, but not because of misfortune, but through the compulsion to go on buying (H. Park, L. Burns 2005, p. 141).
  • When we treat easy credit as a development strategy, the most alluring assumption is that the lack of cheap credit is the biggest cause of poverty. But most indigent people and most people in affluent countries are not budding entrepreneurs. When they borrow money, they spend it on consumption or crises. Many micro borrowers are not able to invest in the remunerative business. When they fail to generate income they are trapped in the loan recycling process. They take out new loans to pay off previous ones, or they sell valuable assets, making them poorer (D. Stoll 2010 p. 136).


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References

Author: Weronika Piotrowska