Topic 5 - Good Debt Bad Debt Flashcards
(65 cards)
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
