A liquidity constraint in economic theory is a form of imperfection in the capital market

Capital market

A capital market is a market for securities , where business enterprises and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year, as the raising of short-term funds takes place on other markets...

. It causes difficulties for models based on intertemporal consumption

Intertemporal consumption

Economic theories of intertemporal consumption seek to explain people's preferences in relation to consumption and saving over the course of their life...

.

Many economic models require individuals to save

Saving (money)

Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in a bank or pension plan. Saving also includes reducing expenditures, such as recurring costs...

 or borrow

Borrow

Borrow or borrowing can mean: to receive from somebody temporarily, expecting to return it.*In finance, monetary debt*In language, the use of loanwords...

 money from time to time.

A liquidity constraint is an arbitrary limit on the amount an individual can borrow, or an arbitrary alteration in the interest rate

Interest rate

An interest rate is the rate at which interest is paid by a borrower for the use of money that they borrow from a lender. For example, a small company borrows capital from a bank to buy new assets for their business, and in return the lender receives interest at a predetermined interest rate for...

 they pay. By raising the costs of borrowing, they prevent individuals from fully optimising their behaviour over time.

Actually existing liquidity constraints are mainly due to risk-based behaviour by lenders such as bank

Bank

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

s.

Mortgage

Mortgage loan

A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...

 lending is the cheapest way of an individual borrowing money, but is only available to people with enough savings to buy property. Because the loan is secured on a house or other property, it is only accessible to particular individuals (those who have enough savings to put down a deposit).
Other forms of credit, like unsecured loan

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s, credit card

Credit card

A credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...

s and loan shark

Loan shark

A loan shark is a person or body that offers unsecured loans at illegally high interest rates to individuals, often enforcing repayment by blackmail or threats of violence....

s, have progressively higher interest rates, and are used more by poorer people.