A credit crunch occurs when there is a sudden reduction in the general availability of loans or credit. This situation often arises during economic downturns, when banks become more cautious about lending money due to fears of defaults. As a result, businesses and consumers may find it difficult to secure financing, which can slow down economic growth. During a credit crunch, interest rates may rise as lenders tighten their requirements. This can lead to decreased spending by consumers and businesses, further exacerbating economic challenges. The effects of a credit crunch can be felt across various sectors, impacting everything from housing markets to small businesses.