As featured in Banking Exchange:
Written by Chris Luth, Lead Product Manager - North America
Capital constraint, or the inability to borrow money is a serious problem for borrowers, lenders and the overall economy. Think of the axiom that $1 today is worth more than $1 tomorrow. This money principle applies when you buy a house or a car. Over time, you pay off the loan with interest so you pay even more over time. The same principle also applies to smaller loans. If you need essential car repair or child care today, and your only option is to use a credit card or borrow some money to cover that cost, that is capital constraint.
Capital constraint prohibits customers from being able to exchange dollars today for dollars tomorrow. They don’t have access to efficient capital today, so they’ll need to overpay tomorrow. It can be all too easy to ask a customer, “Why don’t you pay off your credit card and have $0 in savings?” but that comes from an assumption that they actually have the ability to access those resources.