Chapter 2A - Budgeting, Managing Debt and Borrowing

Question 1

How would you calculate disposable income?

Answer 1

Income minus Expenditure

Question 2

If a client has fully allocated their net income, is it possible to make allocations for savings?

Answer 2

Sometimes, yes. Some amount could be redirected to higher priority savings

Question 3

True or False: Income and Expenditure analysis is an integral part of the advice process?

Answer 3

True

Question 4

Why is it important to always seek a full financial picture, instead of basing recommendations off of ‘surplus’ income?

Answer 4

• more sustainable
• could lose value if client cannot continue
• better partial solution that works, than a perfect one that does not

Question 5

What are the two key pieces of information needed to determine a clients’ budget for spending?

Answer 5

Income and Outgoings

Question 6

What can be included under the banner of Income?

Answer 6

• Earnings from employment/self-employment
• State or private benefits
• Pensions
• Income from Savings/Investments
• Maintenance
• Other Income (rental)

Question 7

What three categories of expenditure are there?

Answer 7

• Essential Spending (housing, insurance, tax, bills)
• Everyday Spending (food, cleaning, travel)
• Occasional/non-essential Spending (clothing, entertainment, birthdays)

Question 8

What three tips could you offer a client who is regularly struggling to make ends meet?

Answer 8

• cutback on non-essential spending
• check APR on credit; shop around for deal
• shop for better deal on phone, gas and electricity

Question 9

When prioritising a clients’ debt, what would be considered Priority Debt?

Answer 9

Mortgages, Utilities and Council Tax

Question 10

When prioritising a clients’ debt, what would be considered a lower-priority debt?

Answer 10

Credit Cards, Overdrafts and Personal Borrowing

Question 11

What are six signs that may indicate the start of a Debt Problem for a client?

Answer 11

• using credit to pay everyday bills
• considering a consolidation loan to reduce monthly payments
• only paying the minimum on credit cards
• using their credit card for cash advances
• using a credit card to pay mortgage
• borrowing without a method to pay it back

Question 12

How may a client benefit from contacting people they owe as soon as possible?

Answer 12

The lender may be able to set up an arrangement for spreading payments

Question 13

Why is it important to review the income of a client struggling with debts?

Answer 13

may be entitled to further benefits or tax credits

Question 14

If a client has multiple unsecured debts and surplus income, what should be used?

Answer 14

A Debt Management Plan (DMP)

Question 15

True or False: Private debt consolidations companies will work for free

Answer 15

False; private companies may take a fee, though there are free options

Question 16

How does a Debt Management Plan (DMP) work?

Answer 16

• multiple debts
• negotiate a payment plan
• one monthly payment split amongst all owed parties

Question 17

Advisers for debt management must be properly licensed under which legislation?

Answer 17

Consumer Credits Act 1974/2006

Question 18

What name is given to the process of securing a new loan, often with preferable interest and payment options, to cover old debts?

Answer 18

Debt Consolidation

Question 19

What are the five reasons that advisers should be wary of advising debt consolidation?

Answer 19

• companies charge high fees, including for early repayment
• may pay more over term, even if monthly payment is lower
• client with history of running up loans may continue to do so until the situation is more serious
• possibly higher costs if not paid, which will make it worse
• if secured against property, may lose home

Question 20

Where could a client get free debt advice?

Answer 20

• Citizens Advice
• National Debtline
• PayPlan
• StepChange Debt Charity

Question 21

What are the two last resorts for clients in debt?

Answer 21

Individual Voluntary Arrangement or Bankruptcy

Question 22

What is the difference between a secured and an unsecured loan?

Answer 22

secured is tied to a property, so can be lost if repayments are not kept up

Question 23

What advice should be considered for clients with significant amounts of cash and investments, who also have mortgage(s)?

Answer 23

using cashflow to reduce their borrowing