Topic 5 - Good Debt Bad Debt Flashcards
what is the danger of accumulating rising debt
if you carry one months deficit over to the next month and add to it
won’t be able to afford to pay back the money you’ve borrowed
why do people borrow to finance a substantial purchase
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
what is ‘equity’
the difference between the amount owed on the mortgage and the market value of the house
due to the long term nature of mortgages, if house prices rise what will the borrow get…
a capital gain
what can be done if the individual has positive equity on their property
the amount can be secured for a loan to finance home improvements, life events or emergencies
what is the opportunity cost of agreeing to repay borrowed money from their future income
they will not have as much money in the future
why do borrowers charge interest
to recompense the lender for the use of its money over the time of the loan and for the risks taken
what is the problem with agreeing to repay debts with future incomes and unexpected events
something might happen that affects their ability to repay
what is hardcore debt
when borrowing gets out control and have to borrow more to repay debts, but an amount builds up that cannot be paid off
serious effect of defaulting on a secured loan
will lose the asset they secured against
serious effects f defaulting on an unsecured loan
obtain a bad financial reputation and may be unable to get credit again, may be declare bankrupt
why are younger people more likely to borrow money
to finance studies, day to day cash flow and larger items of expenditure
what two things were lenders found guilty of irresponsible lending for
providing credit too easily and lending to those who cannot afford to pay back
how many houses were repossessed in 2009
how many mortgages properties were repossessed in 2014
46 000
5000
how many mortgages were in arrears in 2009
what did this fall to by 2014
196000
125000
what did the Council of Mortgage Lenders say has led to mortgage arrears and repossessions declining
low interest rates, intelligent communication and loan forbearance
why have credit card interest rates become so high since the financial crisis
because credit card lenders were forced to write off large amounts of debt after the financial crisis
what 3 things should be considered when considering a loan
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
deciding to borrows depends on the individuals … (4)
attitude to debt
attitude to risk
cultural groups and ethical values
integration into budget plans
name the 3 credit reference agencies
experian
equifax
callcredit
what do credit reference agencies do
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
2 examples of sensible use of borrowing products for someone who is always short of funds at the end of the month
credit card
overdraft
what is the problem with ‘shopping around’ for loans
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
what shows up as a negative footprint in a persons credit history file
late/missed payments
building up payment arrears
defaulting on loans
why might a lender refuse to offer credit
if they think there is a bad risk due to already borrowing too much or bad history of repaying
how can a person improve their poor credit history
repaying credit contracts in time and in full
this will leave positive footprints
why do providers avoid those who pay off their credit card in full every month
avoid paying interest, the bank makes no money off of them
what is a consolidation loan
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
what does money box on radio 4 suggest to those with debt problems
never go to a commercial company for help, should use a free charity
what do citizens advice first advice those with debt problems to do
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
what should a debtor do if they miss payments an there are arrears
contact the relevant creditors and make arrangements to pay extra each month Over an agreed period
what is an informal payment plan
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
what will creditors usually agree to if they see evidence of regular income and no spending on non essential luxuries
reducing the monthly repayment and stop charging interest and missed payment frees
the monthly amount negotiated with creditors should be
proportionate to the size of total debt, so all creditors are treated fairly and all debts repaid over the same period
what 4 free organisations offer debt management plans
stepchange
national debtline
pay plan
debt advice foundation
what do organisations do for a debt management plan
contact creditors and agree a monthly affordable repayment, debtors send money to the DMP manager who passes on the individual amounts to creditors
if debtor has a large unsustainable amount of debt what might the creditor do
pass debt into debt collection agency who may threaten court action
why happens if an individual is taken to county court due to debts
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
what is an administration order
similar to a DMP but pay single monthly payment to the court
what is a county court judgement (CCJ)
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
what circumstances might lead to an IVA or DRO or bankruptcy instead
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
what is an individual voluntary arrangement (IVA)
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)
when will creditors agree to an IVA
if the payments that they recieve amount to at least 30% of the money owed
how many creditors must agree to an IVA to make it legally binding
must represent at least 75% of the total debt
what happens if debtor makes the repayments for the full length of the term
debts are classified as discharged and they are officially debt free of unsecured debt
what costs are involved in an IVA
court fees
nominee fee for preparing and setting up to insolvency practitioner (£2500)
Annual supervisory fee for administering to insolvency practitioner (£1000/year)
examples of a licensed insolvency practitioner (IP)
firms accountant or solicitor
what are the circumstances for a debt relief order (DRO)
total unsecured debt of less than £15000
no more than £50/months income after paying for normal household expenses
no more than £300 assets
what is the advantage of a DRO compared to IVA/bankruptcy
quicker and easier route to being debt free
debtors can apply for a DRO online using one of the 4 free debt advice agencies which are
stepchange
national debtline
pay plan
debt advice find
who do the agency send the DRO application to, to decide whether or not to make the order
the courts official receiver
how much does the DRO cost
£90 administration fee
what happens after DRO is in place
debts are frozen, no longer have to make repayments and creditors cannot take court action to recover the debt
when are the debts discharged from a DRO
after 12 months if circumstances don’t improve
why might a person not get an IVA and be forced into bankruptcy
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
who can ask the court to declare a person bankrupt
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
what happens when a person is declared bankrupt
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
what are the costs involved in bankruptcy
£700 court fees plus legal fees for solicitor
what are the benefits of bankruptcy
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
what are the disadvantages of bankruptcy
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
3 aspects of culture
ethnic background
religious background
social groups they belong to
what does a persons culture reflect
where an how they were brought up
childhood ideas
value system
what is important to them
what was the perception to borrowing in the 70s
to be avoided, seen as risky and led to unmanageable debt
hire purchases were looked down on for low income families
70s perception on saving
saving and thrift were virtues
‘delayed gratification’ - better to save, sign of strong moral character
what was the changed perceptions and attitudes in the 80s
easy availability of borrowing made it more socially acceptable
social prestige in being the first to own an innovative item in a group
