Topic 5 Flashcards
Q: What is borrowing used for in relation to income and expenditure?
A: Borrowing helps smooth out differences in timing between income and expenditure, such as when someone is short of funds at the end of the month
Q: What is a deficit in terms of personal finance?
A: A deficit occurs when spending exceeds monthly income, resulting in a negative bank balance
Q: Why might borrowing to cover a temporary deficit be sensible?
A: It is sensible if you know you will have extra money next month to repay it
Q: What risk is associated with borrowing to cover ongoing deficits?
A: The risk of accumulating rising debt that you may not be able to repay
Q: Name three common items people borrow money to buy.
A: A house, a car, and furniture
Q: What is a mortgage loan?
A: A loan taken out to buy a house, typically repaid over many years
Why do mortgage loans have lower interest rates compared to other loans?
A: Because the loan is secured against the property, reducing the lender’s risk.
Q: What happens if a borrower cannot maintain mortgage repayments?
A: The lender can sell the property to recover losses.
Q: What is ‘equity’ in the context of homeownership?
A: The difference between the amount owed on a mortgage and the market value of the house
Q: How can positive equity be used?
A: As security for loans to finance purchases, home improvements, life events, or emergencies
Q: Why would buying a home be impossible for most people without a mortgage?
A: Because it allows them to spread repayments over 25 years or more
Q: What happens to future income when someone borrows money?
A: Borrowers must repay the debt from future income, reducing the amount available for other spending
What is the opportunity cost of borrowing?
A: The value of the best alternative purchase that could have been made with the money used to repay the loan
What is the cost of borrowing called?
A: Interest
Why do lenders charge interest?
A: To compensate for the use of their money and the risk that the borrower might default
Q: Which type of loan typically has the lowest interest rates and why?
A: Mortgages, because they are secured on the property.
Q: Name a type of debt that is very expensive.
A: Payday loans.
Q: What is a major risk borrowers face when repaying debt from future income?
A: They may lose their job or face unexpected expenses, affecting their ability to repay
What is hardcore debt?
A: Debt that the borrower will never be able to repay, often leading to serious financial and psychological stress
What happens if a borrower defaults on a secured loan, such as a mortgage?
A: They will lose the asset, such as their home
What is the consequence of defaulting on a hire purchase agreement?
A: The borrower will lose the goods and cannot recover the payments already made
What is a financial footprint, and why is it important?
refers to a person’s credit reputation. A bad financial footprint can make it difficult to get credit in the future
Q: What is the worst-case scenario for someone who cannot repay their debts?
A: They could be declared bankrupt
Q: How can borrowing lead to psychological effects?
A: Debt stress can affect the borrower and their relatives and friends, causing anxiety and worry.
Defaulting on a loan is a serious matter:
If the loan is secured on an asset, such as a mortgage secured on a home, the borrowers will lose that asset - their home - if they stop meeting the repayments. If the borrowing is in the form of a hire purchase agreement, the borrower will lose the goods and will not be able to recoup the payments already made.
If the loan is unsecured, the defaulter will obtain a bad financial reputation or ‘financial footprint ‘, which means that they may be unable to get credit again. In the worst case, the person could be declared bankrupt.
Why are young people more likely to borrow compared to older people
A: Young people often need loans to finance their studies, cover day-to-day expenses, and manage larger expenditures
What contributed to the 2007-08 financial crisis in terms of borrowing and lending behavior?
A: Irresponsible lending practices, such as providing credit to those unable to repay, contributed to the crisis
Q: How did the financial crisis impact people’s employment and borrowing?
A: Many people lost their jobs, making it harder to repay debts, which worsened the impact of unemployment for those who already owed money
Q: What happened to mortgage repossessions after 2007?
increased significantly, with 46,000 homes repossessed in 2009, the highest since 1995
Q: What trend was observed in mortgage arrears from 2009 to 2017?
peaked in 2009 at 196,000 cases but gradually declined to 88,300 by 2017
What is “loan forbearance”?
A: It is a temporary allowance given to borrowers experiencing financial difficulty, allowing them to pause or reduce repayments.
Q: What might happen to repossessions if interest rates rise?
A: Repossessions are likely to increase, as people may struggle to meet higher repayments
Q: How has societal perception of debt changed over time?
once considered undesirable, is now viewed as a normal part of life for both individuals and businesses.
Q: What long-term effect did the financial crisis have on attitudes towards borrowing?
A: People became more cautious about borrowing in the immediate aftermath, although this effect may be short-lived
Q: How have lenders changed their behavior post-financial crisis?
A: Lenders have become more selective, approving loans for customers with better credit histories and increasing interest rates on lending products
Q: Why did credit card rates rise between 2006 and 2011?
A: Rates rose due to the high risk of default and the need for providers to compensate for large amounts of debt write-offs after the crisis.
Balancing benefits and costs
When looking to borrow individuals should:
- Consider their current debt situation and assess whether it would be a good idea to borrow more
- Compare different products to find the best deal (but don’t apply for lots of different products as this could have a negative affect on the individual’s credit file)
- Ensure the interest rate they pay is reasonable when considered against the purpose of the loan
- Consider the appropriate length of time a loan should be for, I.e 25 year mortgage would be appropriate for a house purchase
Q: What should someone consider when financing expenditure with a loan?
A: Both the benefits and costs of borrowing
Q: Why should the advantages and disadvantages of loans not be considered in isolation?
A: Because they should be assessed in light of other loans the borrower might already have taken out, considering the overall debt situation.
Q: How should the length of a loan correspond to the life of the item purchased?
A: A longer loan is suitable for long-term assets like a house but not for short-term items like a computer
Q: What influences an individual’s decision to borrow?
A: Their attitude to debt and risk, as well as the cultural and ethical values of the group they belong to
Q: To what extent do people borrow money?
A: Only to the extent with which they feel comfortable.
Q: How should borrowing decisions fit into an individual’s financial plan?
A: Borrowing decisions should be integrated into short-term and medium-term budgeting plans, cash-flow forecasts, and justified as part of a long-term financial plan
Q: What are the three major credit reference agencies in the UK?
A:
1. Experian: www.experian.co.uk
2. Equifax: www.equifax.co.uk
3. TransUnion: www.transunion.co.uk
What information do credit reference agencies use to compile consumer profiles?
A:
• Data from banks, building societies, and credit card companies.
• Information from county court judgments (CCJs), the electoral register, bankruptcy orders, and house repossessions
What details about loans and repayments are recorded by credit reference agencies?
A:
• Details of every loan, credit card, or credit agreement an individual has.
• The amount borrowed and payment history, including adherence to monthly payments.
Do credit reference agencies decide on loan approvals?
A:
No, they only provide information to lenders. They do not make decisions or keep a “blacklist.
What happens when a person applies for a borrowing product?
A:
• The lender searches the applicant’s credit file, leaving an electronic “footprint.”
• Multiple searches may indicate financial difficulties to lenders
What causes negative financial footprints on a credit history?
A:
• Missing payments
• Defaulting on loan agreements.
• Missing payments on mobile phone contracts
Why might a financial institution refuse credit to an applicant?
A:
• If the applicant has borrowed too much.
• If they have a poor repayment history
What can individuals do if they believe their credit history is inaccurate?
A:
• Check their credit history online through the agency’s website.
• Write to the agency to see their file
How can a poor credit history be improved?
A:
By repaying loans, credit cards, etc., on time and in full.
Q: What behavior leaves a favorable financial footprint?
A:
• Paying loans and mortgages on time every month.
• Regularly paying more than the minimum payment on credit card balances by the due date
Q: Why might credit card companies find certain customers less attractive?
A:
• People who pay off their balance in full every month do not generate interest revenue for the company
Q: When does debt become a problem for borrowers?
when borrowers cannot meet agreed monthly payments without borrowing more money, often because they borrowed too much or lost their income
Q: How can debt remain a useful financial tool?
when borrowers limit it to what they can afford, considering other expenditures
Q: What is a consolidation loan, and how does it help individuals in debt?
provides enough money to pay off all other debts. It is often secured on the borrower’s home, assuming the borrower is a homeowner and has positive equity
What are the potential benefits of a consolidation loan?
A:
• Lower interest rates compared to existing debts.
• Longer repayment period, which reduces monthly payments
What should debtors be cautious about when taking out a consolidation loan?
A:
• High-interest loans.
• Legal terms, arrangement fees, and other charges in the “small print.”
• Risk of being unable to repay the loan, especially if it is secured on a property, which could put their home at risk.
Why do people often take out consolidation loans as a last resort?
A: They may be desperate to cover debts and not fully understand the terms, leading to potential financial risks.
What is the first step for someone who cannot repay their debts?
A: Recognise that there is a problem and ask for help
Why should people avoid commercial debt management companies?
A: They often charge high fees and make misleading claims, such as “wiping out 75% of debts.
What is a recommended free source for debt advice?
A: Citizens Advice, available online or through local offices.
What does Citizens Advice recommend debtors to do first?
A: Make a list of income and current expenses, prioritizing payments in order of importance.
What are examples of priority payments?
A: - Secured loans (e.g., mortgage or rent)
• Utility bills (electricity, gas, water)
• Council tax, child support, and maintenance payments
• Income tax and TV licenses
• Car payments necessary for work or disability
What should a debtor do if they have missed priority payments?
A: Contact creditors and arrange to pay extra each month to clear arrears over an agreed period
What are informal payment plans?
A: Agreements where the debtor uses surplus income after essential spending to make regular payments on non-priority debts
What should debtors explain to creditors when negotiating repayments?
A: Their financial situation and the payments they can afford.
Under what conditions will creditors agree to reduced monthly payments?
A: When there is evidence of regular income, no spending on luxuries, and effort to repay the debt
How should repayments be distributed among creditors in informal plans?
A: Proportionally to the size of the total debt to ensure fairness and simultaneous repayment
What is a Debt Management Plan (DMP), and who can provide help with setting one up?
is a formal arrangement where an organisation helps a debtor contact creditors and agree on affordable monthly payments. Examples of organisations offering this service include:
• StepChange Debt Charity: www.stepchange.org
• National Debtline: www.nationaldebtline.org
• PayPlan: www.payplan.com
• Debt Advice Foundation
What do DMP organisations do after contacting creditors?
A: They agree on affordable monthly payments with each creditor. The debtor then makes one payment to the DMP manager, who distributes the funds to creditors in agreed amounts
What can happen if a debtor builds up unsustainable debt and does not take steps to deal with it?
A: Creditors may pass the debt to a debt collection agency, which might threaten court action if payments are not brought up to date
Is it possible to avoid court when dealing with unsustainable debt?
A: Yes, it is often still possible to negotiate an affordable repayment plan before court action is pursued
What type of court handles debt cases, and what is its role?
county court, which determines whether the debt exists, how it should be repaid, and may impose a repayment structure
What happens if a debtor’s unsecured debt is under £5,000 and they cannot repay it?
A: The court can impose:
• An administration order, where the debtor pays debts in monthly installments.
• A county court judgment (CCJ), requiring repayment by a specific deadline
What is an administration order, and how does it differ from a DMP?
A: An administration order is similar to a DMP but involves paying a single monthly amount to the court instead of a DMP manager
What is a CCJ, and what does it require?
A: A CCJ is a legally binding order requiring the debtor to repay the debt, either in full or by installments, by a certain deadline
What additional costs do administration orders and CCJs incur?
A: They incur court fees, which are added to the total debt and included in the debtor’s monthly repayment.
What happens if creditors don’t agree to a Debt Management Plan (DMP)?
A: Options like Individual Voluntary Arrangements (IVA), Debt Relief Orders (DRO), or bankruptcy may be necessary.
What is an Individual Voluntary Arrangement (IVA)?
A: A formal agreement between a debtor and creditors, requiring creditors representing at least 75% of the total debt value to agree to the arrangement for it to become legally binding
Who oversees an IVA and what do they do?
A: A licensed Insolvency Practitioner (IP), typically a firm of accountants or solicitors. They examine the debtor’s finances and decide how much the debtor must pay monthly into the IVA over a fixed period (usually five years)
What is the minimum repayment requirement for creditors to accept an IVA?
A: Creditors generally require at least 30% of the money owed, although some demand 40% or 50%
What happens to debts after completing an IVA?
A: If all monthly repayments are made for the IVA term, the debts are discharged, and the debtor is officially debt-free for unsecured debts
What costs are involved in establishing an IVA?
A:
1.
1. Nominee Fee: Typically £2,500, charged for preparing and setting up the IVA.
2. Annual Supervisory Fee: Typically £1,000 per year for administering the IVA.
These fees are usually included in the debtor’s monthly IVA payment
What is the advantage of organizations offering free DMP services over IVAs?
A: They do not charge a nominee fee, unlike IVAs
What is a Debt Relief Order (DRO)?
A: An alternative to an IVA or bankruptcy for individuals with:
• Unsecured debts under £30,000*
• Low surplus income (no more than £75* per month after household expenses)
• Few or no assets (no more than £2,000*)
Why are DROs considered easier than IVAs or bankruptcy?
A:
1. Applications can be made online via authorized free debt advice agencies (e.g., StepChange Debt Charity, National Debtline, Payplan, Debt Advice Foundation).
2. The process is faster, and the court’s Official Receiver decides on the order
Are there fees for DROs?
A: Yes, there is an administration fee for DROs, which can be paid in installments
What happens to debts included in a Debt Relief Order (DRO) after it is in place?
A: The debts are frozen, repayments stop, and creditors cannot take court action. After 12 months, the debts are discharged
Why might a debtor be unable to use an Individual Voluntary Arrangement (IVA)?
A:
1. Insufficient surplus income for an acceptable monthly repayment.
2. Failure to gain 75% creditor support for the IVA.
3. Defaulting on IVA repayments
What can trigger a bankruptcy process?
A:
• A creditor owed at least £5,000 can ask the court to declare bankruptcy.
• The individual can voluntarily apply for bankruptcy if struggling to repay unsecured debts
Q: Who oversees a bankruptcy process once declared?
A: The Official Receiver (an officer of the court) or a licensed insolvency practitioner (IP) manages the debtor’s finances
Q: What happens to the debtor’s accounts and assets during bankruptcy?
A:
• Accounts and assets are frozen.
• Arrangements are made to sell assets, including their home (if applicable), to repay as much debt as possible
Q: How much can bankruptcy cost, including court fees and legal fees?
A: Up to £700 in court fees plus additional legal fees if a solicitor is used
Q: What is a key benefit of bankruptcy for some individuals?
A: It allows them to clear debts and make a fresh start, often with bankruptcy being discharged after 12 months
Q: Who decides how much debt the debtor can repay during bankruptcy?
A: The Official Receiver or the insolvency practitioner
Q: What are the disadvantages of bankruptcy?
A:
1. Damaging financial footprint on credit history for six years.
2. Limited to a basic bank account during bankruptcy.
3. Potential loss of home and other assets.
4. Banned from certain professions, such as police, armed forces, accountant, financial adviser, solicitor, or company director.
5. Potential embarrassment due to public advertisement of bankruptcy proceedings.
How does culture influence perceptions of financial products?
A: Culture affects how people approach financial services, including the products they buy and the suppliers they choose. This is shaped by their upbringing, peer group values, and broader societal influences
How do people from different cultural backgrounds view debt?
A:
1. Lenient attitude towards debt:
• Some individuals, such as businesspeople, are unconcerned about debt and bankruptcy.
• They might transfer assets to family members to protect them from creditors in case of repayment issues
- Strict avoidance of debt:
• Others see debt as something to avoid at all costs.
• Religious beliefs, such as Islamic law (Sharia), forbid the paying and receiving of interest (Riba), making borrowing from financial institutions unacceptable.
What are some religious perspectives on financial products and debt?
A:
• Islamic perspective: Sharia law prohibits interest (Riba), excluding Muslims from borrowing under conventional terms.
• Other prohibitions: Some religions ban gambling, which includes stock market investments in their interpretation
What did the 2011 Census reveal about Muslims in England and Wales?
A: Muslims were the second-largest religious group, making up 4.8% of the population (2.7 million people)
How can extreme attitudes towards debt influence perspectives?
A:
• Borrowing without restraint: Those who take on excessive debt might learn financial discipline.
• Avoidance of all debt: People who refuse to borrow might recognize the benefits of limited, purposeful debt.
• Some individuals hold strong beliefs about debt that are not easily influenced
How can cultural attitudes towards financial products change over a lifetime?
A:
• People may adopt new values and priorities through life experiences, such as living abroad or marrying into different cultures.
• However, others may maintain their original cultural attitudes despite societal changes
How does generational influence shape attitudes toward debt?
A: Today’s borrowers may have parents who strongly believed in avoiding debt and saving. Cultural shifts and societal changes influence how new generations manage money
What was the general attitude toward borrowing before the 1970s?
A: Borrowing was seen as risky, avoided if possible, and associated with social stigma.
What type of loan was socially acceptable before the 1970s?
A: Mortgages were the only socially acceptable form of borrowing
Why was “hire purchase” referred to as the “never-never” system?
A: Because people felt they were always paying something off and never fully owned items outright
How were saving and thrift perceived in society before the 1970s?
A: They were seen as virtues, with delayed gratification symbolizing strong moral character
How did home ownership patterns change after the 1970s?
A: More households became owner-occupiers as mortgages became socially acceptable
What caused the shift in attitudes toward borrowing during the 1970s and 1980s?
A: The easy availability of credit cards, store cards, and loans normalized borrowing and even made it a status symbol
What strategies did the government and Bank of England implement after the 2008 crisis?
A: They kept interest rates very low to encourage spending and advertised low-rate loans
Why did many people choose to repay debt rather than borrow more after 2008?
A: The tightened lending criteria and the recession made people reconsider their financial priorities
What cultural value shifted in borrowing behavior after the 1970s?
A: Borrowing for instant gratification replaced saving for delayed gratification as a desirable trait
The proportion of people owning homes has continually risen since the 1950s.
True
False
False
If a borrower defaults on an unsecured loan then:
A. They will obtain a bad financial reputation or footprint
B. The lender will start to take payments directly from the borrower’s salary
C. The lender will take possession of the goods purchases with the loan
D. The lender will instantly send in the bailiffs (someone authorised to collect a debt on behalf of a creditor)
A
Some debt management companies charge for their services
True
false
True
An informal payment plan can be used to pay off
A. Unsecured debts
B. Secured debts
C. Child maintenance arrears
D. Council tax bill
A
Which of the following customers will be most attractive to a credit card company?
A. One who has a history of paying off their balance in full each month
B. One who has a history of regularly paying more than the minimum payment each month
C. One who has been regularly late in making their payments
D. One who has a high paid job and rarely used a credit card
B
The cheapest form of debt management programme is:
A. Bankruptcy
B. A debt relief order
C. An individual voluntary arrangement
B
Which of the following individuals is most likely to have to borrow?
A. A child at school
B. An older person who has been working for some years
C. A young person living at home
D. A young person starting out in adult life
D
A person’s total debt includes:
A. All of the money that they owe from both formal and informal sources
B. Only the money they owe from formal sources
C. Money that is owed to them by informal sources
D. Only money owed to financial service providers
A
Which of the following individuals will only be able to take out a basic bank account?
A. One who has just been made bankrupt
B. One who is subject to an individual voluntary arrangement
C. One who has just set up an informal debt repayment plan
D. One who does not have credit history
A
A debt relief order enables people to write off their debts if they are unable to repay them after:
A. 6 months
B. 12 months
C. 18 months
D. 24 months
B
