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Finance Unit 3 > Topic 5 - Good Debt Bad Debt > Flashcards

Topic 5 - Good Debt Bad Debt Flashcards

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1
Q

what is the danger of accumulating rising debt

if you carry one months deficit over to the next month and add to it

A

won’t be able to afford to pay back the money you’ve borrowed

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2
Q

why do people borrow to finance a substantial purchase

A

if they need to have the item now but is too expensive to be funded by current income and might take too long to save up for

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3
Q

what is ‘equity’

A

the difference between the amount owed on the mortgage and the market value of the house

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4
Q

due to the long term nature of mortgages, if house prices rise what will the borrow get…

A

a capital gain

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5
Q

what can be done if the individual has positive equity on their property

A

the amount can be secured for a loan to finance home improvements, life events or emergencies

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6
Q

what is the opportunity cost of agreeing to repay borrowed money from their future income

A

they will not have as much money in the future

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7
Q

why do borrowers charge interest

A

to recompense the lender for the use of its money over the time of the loan and for the risks taken

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8
Q

what is the problem with agreeing to repay debts with future incomes and unexpected events

A

something might happen that affects their ability to repay

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9
Q

what is hardcore debt

A

when borrowing gets out control and have to borrow more to repay debts, but an amount builds up that cannot be paid off

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10
Q

serious effect of defaulting on a secured loan

A

will lose the asset they secured against

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11
Q

serious effects f defaulting on an unsecured loan

A

obtain a bad financial reputation and may be unable to get credit again, may be declare bankrupt

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12
Q

why are younger people more likely to borrow money

A

to finance studies, day to day cash flow and larger items of expenditure

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13
Q

what two things were lenders found guilty of irresponsible lending for

A

providing credit too easily and lending to those who cannot afford to pay back

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14
Q

how many houses were repossessed in 2009

how many mortgages properties were repossessed in 2014

A

46 000

5000

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15
Q

how many mortgages were in arrears in 2009

what did this fall to by 2014

A

196000

125000

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16
Q

what did the Council of Mortgage Lenders say has led to mortgage arrears and repossessions declining

A

low interest rates, intelligent communication and loan forbearance

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17
Q

why have credit card interest rates become so high since the financial crisis

A

because credit card lenders were forced to write off large amounts of debt after the financial crisis

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18
Q

what 3 things should be considered when considering a loan

A

the advantages and disadvantages both independently and in prospective of other loans

price compared to the purpose of the loan - if items are worth the interest

length of the loan should correspond to the life of the product

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19
Q

deciding to borrows depends on the individuals … (4)

A

attitude to debt
attitude to risk
cultural groups and ethical values
integration into budget plans

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20
Q

name the 3 credit reference agencies

A

experian
equifax
callcredit

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21
Q

what do credit reference agencies do

A

compile information on consumes from lenders, CCJs, the electoral register, bankruptcy orders and house repossessions

records details of all credit agreements - to get a picture of how much the individual has borrowed and how good they are at making repayments

this information is supplied to lenders on request to decide if customers should be grants a loan

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22
Q

2 examples of sensible use of borrowing products for someone who is always short of funds at the end of the month

A

credit card

overdraft

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23
Q

what is the problem with ‘shopping around’ for loans

A

when applying for a borrowing product, the lender searche the credit file, leaving an electronic footprint in the persons file

when applying for an unusually large number of loans, a note is put on their record

shopping around causes problems if lenders see all the footprints as difficulty to get other loans

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24
Q

what shows up as a negative footprint in a persons credit history file

A

late/missed payments
building up payment arrears
defaulting on loans

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25
Q

why might a lender refuse to offer credit

A

if they think there is a bad risk due to already borrowing too much or bad history of repaying

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26
Q

how can a person improve their poor credit history

A

repaying credit contracts in time and in full

this will leave positive footprints

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27
Q

why do providers avoid those who pay off their credit card in full every month

A

avoid paying interest, the bank makes no money off of them

28
Q

what is a consolidation loan

A

a big loan to pay off all smaller loans and often secured against an asset

useful if interest is lower than existing debts and longer repayment term and means a lower monthly repayment

29
Q

what does money box on radio 4 suggest to those with debt problems

A

never go to a commercial company for help, should use a free charity

30
Q

what do citizens advice first advice those with debt problems to do

A

make a list of priority income and expenditures

top: secured loans/payments which may result in vital services being cut off
next: where non-payment may lead to criminal prosecution and possible prison sentence
also: car dependency

31
Q

what should a debtor do if they miss payments an there are arrears

A

contact the relevant creditors and make arrangements to pay extra each month Over an agreed period

32
Q

what is an informal payment plan

A

if debtors income leaves a surplus after all essential spending and priority bills, should use it to offer increased regular repayments in non-priority unsecured debts, negotiating lower monthly repayments over a longer term

33
Q

what will creditors usually agree to if they see evidence of regular income and no spending on non essential luxuries

A

reducing the monthly repayment and stop charging interest and missed payment frees

34
Q

the monthly amount negotiated with creditors should be

A

proportionate to the size of total debt, so all creditors are treated fairly and all debts repaid over the same period

35
Q

what 4 free organisations offer debt management plans

A

stepchange
national debtline
pay plan
debt advice foundation

36
Q

what do organisations do for a debt management plan

A

contact creditors and agree a monthly affordable repayment, debtors send money to the DMP manager who passes on the individual amounts to creditors

37
Q

if debtor has a large unsustainable amount of debt what might the creditor do

A

pass debt into debt collection agency who may threaten court action

38
Q

why happens if an individual is taken to county court due to debts

A

creditor establishes the debt and debtors explain their side of the story, decided how how the debts should be repaid

if debts are unsecured and less than £5000 an court accepts debtor cannot repay all debts, then debtor or creditor can ask or an administration order or CCJ

39
Q

what is an administration order

A

similar to a DMP but pay single monthly payment to the court

40
Q

what is a county court judgement (CCJ)

A

represents a legally binding requirement to pay what the court has decided is owed by a certain deadline

may be paid directly to the creditor or the court

41
Q

what circumstances might lead to an IVA or DRO or bankruptcy instead

A

creditors might not agree to a DMP

debtors might fail to keep up the agree monthly repayment required under a DMP or AO

may already have a number of CCJs against them

outstanding total debt may be more than £5000

42
Q

what is an individual voluntary arrangement (IVA)

A

a formal agreement supervised by a licensed insolvency practitioner - who examined the debtors finances And decides how much they must pay into the IVA each month (£200) for a fixed period (5 years)

43
Q

when will creditors agree to an IVA

A

if the payments that they recieve amount to at least 30% of the money owed

44
Q

how many creditors must agree to an IVA to make it legally binding

A

must represent at least 75% of the total debt

45
Q

what happens if debtor makes the repayments for the full length of the term

A

debts are classified as discharged and they are officially debt free of unsecured debt

46
Q

what costs are involved in an IVA

A

court fees

nominee fee for preparing and setting up to insolvency practitioner (£2500)

Annual supervisory fee for administering to insolvency practitioner (£1000/year)

47
Q

examples of a licensed insolvency practitioner (IP)

A

firms accountant or solicitor

48
Q

what are the circumstances for a debt relief order (DRO)

A

total unsecured debt of less than £15000

no more than £50/months income after paying for normal household expenses

no more than £300 assets

49
Q

what is the advantage of a DRO compared to IVA/bankruptcy

A

quicker and easier route to being debt free

50
Q

debtors can apply for a DRO online using one of the 4 free debt advice agencies which are

A

stepchange
national debtline
pay plan
debt advice find

51
Q

who do the agency send the DRO application to, to decide whether or not to make the order

A

the courts official receiver

52
Q

how much does the DRO cost

A

£90 administration fee

53
Q

what happens after DRO is in place

A

debts are frozen, no longer have to make repayments and creditors cannot take court action to recover the debt

54
Q

when are the debts discharged from a DRO

A

after 12 months if circumstances don’t improve

55
Q

why might a person not get an IVA and be forced into bankruptcy

A

if surplus income is not enough to support an acceptable monthly repayment

failed to get required 75% support

or gained IVA but defaulted in repayments

56
Q

who can ask the court to declare a person bankrupt

A

any creditor who is owed at least £750 on an unsecured loan or the individual if struggling to pay debts can apply for voluntary bankruptcy

57
Q

what happens when a person is declared bankrupt

A

the court appoints the official receiver/licensed IP to take over finances

debts/accounts/assets are all frozen and all assets are sold and proceeds used to pay off as much debt as possible

58
Q

what are the costs involved in bankruptcy

A

£700 court fees plus legal fees for solicitor

59
Q

what are the benefits of bankruptcy

A

easy for those who aren’t homeowners with low assets to make a new start

debts are discharged after 12 months

creditors can no longer chase the debt

60
Q

what are the disadvantages of bankruptcy

A

damaging financial footprint in history for 6 years

only allowed a basic bank account for duration of bankruptcy

loss of home and assets

barred from the police/ armed forces
can’t work as an accountant/financial adviser/solicitor/company director

embarrassment

61
Q

3 aspects of culture

A

ethnic background
religious background
social groups they belong to

62
Q

what does a persons culture reflect

A

where an how they were brought up
childhood ideas
value system
what is important to them

63
Q

what was the perception to borrowing in the 70s

A

to be avoided, seen as risky and led to unmanageable debt

hire purchases were looked down on for low income families

64
Q

70s perception on saving

A

saving and thrift were virtues

‘delayed gratification’ - better to save, sign of strong moral character

65
Q

what was the changed perceptions and attitudes in the 80s

A

easy availability of borrowing made it more socially acceptable

social prestige in being the first to own an innovative item in a group

Finance Unit 3 (7 decks)

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