Pt 2. Serving the Retail Consumer - Budgeting, Managing Debt and Borrowing Flashcards
What is a budgeting assessment?
This allows you to examine whether a proportion of income might be redirected away from current area of expenditure to an area of higher priority.
e.g. reducing amount spent eating out to allow for money redirected to life or health insurance premiums.
What is the role of an adviser?
To formulate recommendations which strike a balance between the identified needs and budget available, so you can ensure advice is sustainable.
What is expenditure?
- Essential spending - e.g. housing costs, insurance, council tax, utilities, child care etc.
- Everyday spending - e.g. food, cleaning, travel, school etc.
- Occasional or non-essential spending - e.g. clothing, entertainment, birthdays, holidays etc.
If there is not much disposable income available, how can you advise to reduce spending?
- Consider making small cut-backs on non-essential items, What could they do without to help them get back on track?
- Check the annual percentage rate (APR) on their credit cards and loans - this indicates the cost of borrowing including interest and charges. See if they can shop around for a better deal.
- They may get a better deal by swithcing services such as phones, electricity or gas to new suppliers, using various online switching sites.
What are priority debts?
This includes mortgages, utilities, and council tax.
What are debts of lessor importance?
This includes credit cards, overdrafts and personal borrowing.
What are the signs that your client may have a debt problem?
- Using credit (loans) to pay everyday bills.
- Considering taking out a consolidation loan to reduce their monthly payments.
- Paying no more than the minimum amounts due on their credit cards.
- Using their credit card to take out cash advances.
- Using their credit card to make mortgage repayments.
- Borrowing money without knowing how they will pay it back.
What is a debt management plan (DMP)?
A third party provider such as a charity or debt management company, who will negociare with their clients creditors and establish acceptable repayment plans with each one.
- Consolidate debts to one monthly affordable payment.
- Payment is distributed fairly between creditors.
- Fee charged for service, but free plans can be available through debt charities.
Who are the debt management plan providers licensed under?
- Consumer Credit Acts 1974/2006
- Authorised with relevant permissions from FCA.
What is debt consolidation?
This means negociating a new loan to repay an existing loan or loans, often wth a lower interest rate and lower monthly payments.
Why should advisers exercise caution in recommending debt consolidation?
- Companies often charge high fees, including those for early repayment.
- They may pay lower monthly, but may end up paying much more over length of loan.
- History of client running up loans may continue, placing them in a more serious situation.
- Client unable to afford the service loan may lead to higher costs and penalities, making the clients financial situation worse.
- In worse case, if loan secured on property, they could lose home if default on payments.
If a clients debt situation is spiralling out of control, what can an adviser do?
- Recommend further expert advice through debt concelling, e.g. Citizen’s Advice, National Debtline, PayPlan, StepChange Debt Charity can offer free service face to face or via telephone.
- Last option would be client meeting an individual voluntary arrangement or bankruptcy, involving legal proceedings.
What is the risk of property loans?
- This could result in individuals losing their homes if they fail to make required repayments.
- Clients buy to let homes may be at risk if they have mortgages aside from main residence.
