What happens to loans when a recession happens?

In a recession,  the likely outcomes would includes asset value contracts and falls rapidly. Liabilities remain and increase due to interest. Borrower’s equity in the asset evaporates very fast.  Liquidity in some of the assets evaporates,  rendering liquidation of assets difficult to meet liabilities.

There is a sharp winding down of assets either voluntarily by the borrowers or forced liquidation by lenders through foreclosures and even bankruptcies rise in recession.  

Investors and borrowers become extremely risk averse which includes banks might tighten up on their lending activities.

Lenders suffer huge losses. Their capital gets eroded very fast. This triggers their shares being sold. 

So there is cascading effect of loans not getting repaid during recession in all sections of the economy.   

The effects of recession remain in the economy for long time to come.


Categories: Personal Finance

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