finance unit three- topic five

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what are the benefits of borrowing?
it can smooth out deficits, can help with a substantial purchase they can't afford now, borrowing for a mortgage means they won't have to pay rent in retirement and gives them security, they could also have equity on the house
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what are the dangers of borrowing?
debt can get out of control which can lead to ******** debt, if they default on a secured loan they will lose the asset and if they default on an unsecured loan they will get a bad credit score
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what are benefits of a mortgage?
interests rates are lower than other kinds of loans, the repayments are long term so they're similar to what they would pay in rent, after it's all paid off they will own the house and they will have the benefit of having a sense of security
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what is ******** debt?
debt that a person isn't in a position to repay because their regular outgoings take up all available outgoings
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what is the risk with a secured loan?
if they default on the loan, they will lose the asset it's secured on
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what is the risk with an unsecured loan?
the defaulter will get a bad financial footprint and in the worst cases they could be declared bankrupt
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what is loan forebearance?
when a lender doesn't seek to repossess a property as soon as the borrower misses a few monthly repayments, instead allowing the customer to stop paying or make reduced payments for a set period
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what are the factors affecting whether a person shoudl take out a loan?
they should look at their overall debt situation and not just each loan seperately, the price theyre paying compared with purpose of loan- whether it could be borrowed cheaper elsewhere, the length of the loan should correspond with life of item
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what is the role of a credit reference agency?
an independent organisation that maintains records of people's credit history- data provided by lenders
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how is a financial footprint created?
CRAs compile files on consumers using info from providers, they take info from CCJs, electoral register, bankruptcy orders and house repossessions, everytime a person applies for a product lender will search and this leaves a financial footprint
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how could "shopping around" for the best financial product affect a consumer's credit history?
lenders may view multiple credit searches by multiple credit agencies as a sign teh person's finding it hard to get a loan agreed
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what other factors affect a person's financial footprint/ credit history?
making late payments or missing payments, building up payment arrears and defaulting on a loan credit agreement and missing monthly repayments on phone bills
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what can a person do if they're refused a loan?
they can check their credit history online at the CRA's websites or they can write to them and ask to see their files
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how can poor credit histories be improved?
by consumers repaying their loans, credit cards and other credit in full, on time
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why are peopel who avoid paying interest on credit cards by paying them off in full unattractive to credit card companies?
the credit card company won't make any money through interest repayments out of these customer
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what is a consolidation loan?
a loan used to pay off a number of different debts, meaning there is only one repayment ecah month, to the loan company
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when is a consolidation loan a solution to debt problems?
if it has a lower interest rate than the existing debts and if it has a longer repayment period meaning monthly repayments will be reduced further
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what are priority payments?
bills that an individual has a legal obligation to pay and where the consequences of not repaying them may be a fine or prison term
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what is an informal payment plan?
if the debtor has income to leave a surplus they should contact provider to whcih they owe money & explain the situation. a creditor will usually agree to accept reduced monthly repayments & to stop charging interest & missed payment fees
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what is a debt management plan?
anyone who isn't capable of making informal payment plan arrangements themselves can go to orgs such as stepchange debt charit, payplan or national debtline to set up a more formal DMP
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what is the role of a debt collection agency?
if an individual builds up an unsustainable level of debt and can't afford to keep up monthly repayments but doesn't see there's a problem, the creditors may pass the debt to a DCA who can threaten court action if they don't keep up repayments
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what is an administration order?
a repayment arranged by county courts in Eng, Wales and NI for people with less than £5,000 in unsecured debt and at least 1 CCJ against them
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what is a county curt judgement?
in england and wales, a judgement issued by a county court to a person who doesn't respond to court action from a person or organisation to which they owe money
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what is an IVA?
a formal alternative to bankruptcy comprising of contractual arrangement with those owed money
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what is a DRO?
an order a person is certain circumstances can apply for if they cannot afford to pay off debts. it lasts one year, during which none of the people owed money to can take action and after which the debts are cleared. cheaper than bankruptcy
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once a DRO is in order, the debts are frozen, what does this mean?
debtor no longer makes any repayments and creditors can't take court action to recover debts. after 12 months, the debts are discharged
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how can a debtor be forced in bankruptcy?
if they're unable to get an IVA, or becuase they tried to set up an IVA but the IP has failed to get required 75% creditor support or have agreed to get an IVA but have defaulted on monthly repayments
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what is the role of an official receiver appointed by the court?
to take over the finances of someone whos been declared bankrupt
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who benefits from bankruptcy?
a non homeowner with a low income and very few assets, as bankruptcy is a process that allows them to get from under their debts and make a fresh start
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what s a benefit of bankruptcy?
creditors can no longer chase debtors or take them to court to get back repaymentswhat
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what are the drawbacks of bankruptcy?
damaging financial footprint for 6 years, debtor is only allowed a basic bank account for duration of bankruptcy, debtor loses home and assets, debtor is banned from certain professions and potential embarrassment from proceedings
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what percentage of debt must be paid with a IPP and DMP?
100%
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what percentage of debt must be repaid with a DRO?
none
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what percentage of debt must be repaid with a DRO?
between 30 and 50%
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what percentage of debt must be repaid with a bankruptcy?
whatever cna be raised form selling debtors' assets
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what is the min and max debt for an informal payment plan?
no min, max is limited to an amount that can be repaid over time
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what is the min and max debt for a debt management plan?
min usually £5,000, max limited to an amount that can be repaid over a reasonable amount of time
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what is the min and max debt for a debt relief order?
no min, max £20,000
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what is the min and max debt for an indivdiual voluntary agreement?
min £10,000, no max
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what is the max and min debt for bankruptcy?
no min or max
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are debts discharged with an IPP?
only after full repayment
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are debts discharged with a DMP?
only after full repayment
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are debts discharged with a DRO?
arter 12 months
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are debts discharged with a IVA?
after 5 years
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are debts discharged with bankruptcy?
after 12 months
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are assets affected with an informal payment plan, debt management plan or a debt relief order?
no
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are assets affected with and individual voluntary agreement?
will have to pay any savings into the IVA and may have to use any available equity in properties
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are assets affected with bankruptcy?
all non essential assets will be sold off to help pay debts. homeowners have to sell their home
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are restrictions placed on the debtor with a IPP or a DMP?
none
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are restrictions placed on the debtor with a DRO?
if applying for a new loan, they must tell the lender about teh DRO, allowed to keep bank account but no overdraft
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are restrictions placed on the debtor with a IVA?
may not be allowed to be a solicitor or an accountant cannot take out any new unsecured credit
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are restrictions placed on the debtor with bankruptcy?
same as IVA only allowed a basic bank account and barerd from certain professions
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is credit history/ financial footprint affected by all of these debt solutions?
each solution will leave a negative financia; footprint on a credit record for 6 years
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Other cards in this set

Card 2

Front

what are the dangers of borrowing?

Back

debt can get out of control which can lead to ******** debt, if they default on a secured loan they will lose the asset and if they default on an unsecured loan they will get a bad credit score

Card 3

Front

what are benefits of a mortgage?

Back

Preview of the front of card 3

Card 4

Front

what is ******** debt?

Back

Preview of the front of card 4

Card 5

Front

what is the risk with a secured loan?

Back

Preview of the front of card 5
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