As featured in Banking Exchange:
Capital constraint, or the inability to borrow money, is a serious problem for borrowers, lenders and the wider economy. Consider the axiom that £1 today is worth more than £1 tomorrow. This principle applies when you buy a house or a car. Over time, you pay off the loan with interest, meaning you pay back more in total. The same principle applies to smaller loans. If you need essential car repairs or childcare today, and your only option is to use a credit card or borrow money to cover the cost, that is capital constraint.
Capital constraint prevents customers from being able to exchange money today for money tomorrow. They lack access to efficient capital now, so they end up overpaying later. It is all too easy to ask a customer, “Why don’t you pay off your credit card and have £0 in savings?”, but that assumes they actually have the ability to access those resources.
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