Chapter 2A - Budgeting, Managing Debt and Borrowing Flashcards
How would you calculate disposable income?
Income minus Expenditure
If a client has fully allocated their net income, is it possible to make allocations for savings?
Sometimes, yes. Some amount could be redirected to higher priority savings
True or False: Income and Expenditure analysis is an integral part of the advice process?
True
Why is it important to always seek a full financial picture, instead of basing recommendations off of ‘surplus’ income?
- more sustainable
- could lose value if client cannot continue
- better partial solution that works, than a perfect one that does not
What are the two key pieces of information needed to determine a clients’ budget for spending?
Income and Outgoings
What can be included under the banner of Income?
- Earnings from employment/self-employment
- State or private benefits
- Pensions
- Income from Savings/Investments
- Maintenance
- Other Income (rental)
What three categories of expenditure are there?
- Essential Spending (housing, insurance, tax, bills)
- Everyday Spending (food, cleaning, travel)
- Occasional/non-essential Spending (clothing, entertainment, birthdays)
What three tips could you offer a client who is regularly struggling to make ends meet?
- cutback on non-essential spending
- check APR on credit; shop around for deal
- shop for better deal on phone, gas and electricity
When prioritising a clients’ debt, what would be considered Priority Debt?
Mortgages, Utilities and Council Tax
When prioritising a clients’ debt, what would be considered a lower-priority debt?
Credit Cards, Overdrafts and Personal Borrowing
What are six signs that may indicate the start of a Debt Problem for a client?
- 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
How may a client benefit from contacting people they owe as soon as possible?
The lender may be able to set up an arrangement for spreading payments
Why is it important to review the income of a client struggling with debts?
may be entitled to further benefits or tax credits
If a client has multiple unsecured debts and surplus income, what should be used?
A Debt Management Plan (DMP)
True or False: Private debt consolidations companies will work for free
False; private companies may take a fee, though there are free options
How does a Debt Management Plan (DMP) work?
- multiple debts
- negotiate a payment plan
- one monthly payment split amongst all owed parties
Advisers for debt management must be properly licensed under which legislation?
Consumer Credits Act 1974/2006
What name is given to the process of securing a new loan, often with preferable interest and payment options, to cover old debts?
Debt Consolidation
What are the five reasons that advisers should be wary of advising debt consolidation?
- 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
Where could a client get free debt advice?
- Citizens Advice
- National Debtline
- PayPlan
- StepChange Debt Charity
What are the two last resorts for clients in debt?
Individual Voluntary Arrangement or Bankruptcy
What is the difference between a secured and an unsecured loan?
secured is tied to a property, so can be lost if repayments are not kept up
What advice should be considered for clients with significant amounts of cash and investments, who also have mortgage(s)?
using cashflow to reduce their borrowing
