hey guys how's it going welcome back this is the fifth video in a series of 10 designed to look at each unit of the diploma in financial studies topic five looks at whether debt is good or bad as part of the topic five video we'll be seeking to look at benefits and cost of borrowing different interest rates on different borrowing products attitudes to borrowing and debt Financial Footprints different solutions to individuals in unmanageable debt and different cultural perceptions of financial products so let's first look at some of the benefits of borrowing then so it enables individuals to make purchases that they would otherwise not be able to afford these are things like a car potentially or even a house it might also take too long to save up to buy these items outright which means that borrowing is needed uh for example to put a roof over one's head with a house um alternatively some people might choose to rent of course but with a car you might require the use of a car to get to work for example and therefore saving up to buy the item might not be suitable in that scenario inflation could also make the item more expensive by the time the amount has actually been saved this means that actually borrowing money now to buy an item might be cheaper in the long one compared to saving up for that item item when inflation will make the price more expensive by the time you come to buy it however that said the costs of borrowing when individuals borrow money they have to pay it back along with interest interest on certain types of debts things like payday loans can be extremely high the repayments also need to be factored into future cash flow forecast when you borrow and repayments also present an opportunity cost essentially the fact is they need to be factored into future cash flow forecasts which means that the borrowing interest you have to pay presents an opportunity cost because that money could have been spent elsewhere and defaulting on a loan if you choose to borrow is a serious matter this can have lasting impacts now there's two types of borrowing both secured and unsecured secured means essentially you're putting up some collateral some secur against that borrowing so if you are unable to pay back a mortgage for example the lender may be able to repossess your house unsecured borrowing on the flip side means that you are not putting up collateral so let's look at some of the different interest rates of different borrowing products now this source is the provider's websites in 2021 the first different borrowing product we're going to look at is pay payday loans and some popular payday loan organizations include lending stream and moneybo you can see here the representative APR or annual percentage rate is extremely high lending stream at 1,333 per whereas moneybo only a touch below 1,000% so extremely high aprs over the year of course the idea with payday loans of course is that they're only loaning you that amount for a certain or short period of time store cards are another opportunity to borrow and here's two examples from Argos and New Look the Argos card has a 34.9% AP whereas the new look has a 28.9 these are both significantly lower than the payday loan rates as you can see the thing with store cards is that you might actually get benefits from that particular store by spending at that particular store for example you might get money off discounts or other incentives credit cards are another uh option with the sabur necta credit card for example you ACW nectar points and nectar points can then be spent on different items within Saints Spurs or other stores Tesco Bank and Royal Bank of Scotland credit cards are other options you can see here that the aprs are actually slightly less than the store cards 20.9 9.9 and 12.9 but these do require a good credit rating in order to uh in order to get the card we'll have a look at credit ratings later on other credit cards which do not require a good credit rating Metro Bank Capital One and vanis Visa you can see here the aps are significantly higher than the good credit rating credit cards for example the Capital One has a 34.9% whereas the Tesco Bank low APR card just 99.9% so if you do have a good credit rating it might be worth looking at those three cards personal loans £75,000 unsecured repaid over 36 to 60 months so that's 3 years to 5 years include the Barkley's Bank personal loan Nationwide and the M&S Bank card holder loan you can see here significantly lower aprs than the credit cards the store cards and in particular that paid a loan uh options and coming down to the bottom mortgages these are generally the lowest interest rate however as you can see personal loans with Nationwide and M&S Bank are actually lower back in 2021 mortgages in 2021 centry Building Society at 4.64 and HSBC in First Direct in the 3% range that said this was taken from 2021 and the bank of England's monetary policy committee has set their interest rates significantly higher this year and therefore these typical interest rate examples are to be taken with a pinch of salt because the majority of them are likely to be higher in 20123 so what are some of the attitudes to borrowing and debt then well debt is Common Place in most modern Western societies for both businesses and for individuals reasonable levels of personal debt are actually accepted as the norm now whereas many years ago people might have shied away from taking too much personal debt it has become normal to have a certain level of personal debt younger people are more likely to have to borrow when starting out in adult life because interest rates are significantly higher inflation is higher the average price of a house compared to yearly salary is significantly higher younger people are more likely to have to borrow however that said many people may find themselves over borrowing and they may find themselves getting into financial difficulty this along with irresponsible lending by providers was one of the major factors that led to the 2007 2008 financial crisis so how can we balance the benefits of borrowing against the cost of borrowing well when looking to borrow individuals should one consider their current debt situation and assess whether it would be a good idea to borrow more they should compare different products to find the best deal but don't apply for lots of different products at one time as this could have a negative effect on the individual's credit rating when looking to borrow they should ensure the interest rate they pay is reasonable when considered against the purpose of the loan they should also consider the appropriate length of time a loan should be for I.E a 25-year mortgage would be appropriate for a house purchase but may not be appropriate for smaller purchases so when we're talking about financial Footprints what do we actually mean well lenders will use credit reference agencies to consider the credit history of potential borrowers I.E before they give out loans mortgages or other lending they will consider an individual's history of borrowing I.E have they borrowed large amounts in the past and more importantly have they been able to pay that back on time and in full the three major credit reference agencies we need to be aware of are Experian Equifax and call Credit otherwise known as TransUnion the details of every loan credit card or other creditor agreement that an individual has or has had are recorded in by the credit reference agency by doing this the credit reference agency builds up a picture of how much the individual has borrowed and how good they are at making the required monthly payments that said credit reference agencies only keep information from the last 6 years of an indiv ual's borrowing history whenever a person applies for credit and the lender searches their credit file this will leave a financial footprint essentially a record of when a person has applied for credit and the lender whom with they applied things that leave a negative footprint I.E a negative Trace will include things like applying for many loans in a short space of time to the credit reference agency this shows that potentially a person may be somewhat desperate to get extra money and may not be in control of their own Financial dealings defaulting on a repayment will also leave a negative footprint for example not paying a loan when it is required not paying a credit card off um when your payment is required and of course not paying a payday loan off when that payment is required these are all examples of defaulting on a repayment a third thing which might leave a negative footprint is when you build a payment areas this is when you fall behind on payment and areas are those missed payments essentially building up building up for future repayment of course if you do get into a situation whereby you owe areas then the interest on those areas will be added to the current interest on your on your loan which means that essentially you'll be paying more interest off overall over the course of your loan period individuals can improve their credit rating however so how can they actually do this well a couple of different ways firstly paying off debts on time when the debt becomes due for paying off paying it off on time will improve your credit rating paying off debts in full will also improve your credit credit rating for example if you have a credit card paying off more than a minimum payment I.E paying off in full each month will improve your credit rating so when we're looking at different borrowing methods if we get into unmanageable debt what Solutions are there for individuals well the first thing I would recommend is seeking advice there are a number of different organizations out there which provide advice the first one which is free and funded directly by the government is Citizens advice citizen advice of course used to be called the citizens advice Bureau but now it's just known as Citizens advice this can be accessed online or in branches up and down the country they might advise you to go down one of five different Pathways informal payment plan debt management plans debt Rel orders individual voluntary arrangements or bankruptcy let's compare those five different solutions now so will the debts be frozen will there be no more interest or other charges on the debt well with an informal payment plan of course you can see that only if the Creditor agrees and that's the same for debt management plans but the other three solutions debts will be frozen which means essentially that there won't be any more interest or other charges and the individual lender cannot come and seek further repayments at that time I as I just said you are protected from action to recover the debts by the the lender with debt relief orders ivas and bankruptcies so the lender cannot come after you so that will provide some protection to the individual the amount of the outstanding debt which is repaid is 100% with in informal payment plans and debt management plans with debt relief orders none of the outstanding debt will be repaid and with ivas and bankruptcy it can be slightly more between 30 and 50% with ivas and whatever can be raised by selling debt as assets with a bankruptcy so what is the actual cost of these five options well with an informal payment plan and debt management plan there is no cost debt management plan if you're using a free online debt advisor that is debt relief orders cost £90 whereas ivas cost around7 half thousand bankruptcy will cost you around 700 Court fee plus any solicitor fees so what is the minimum and maximum total debt which you can have in order to apply for one of these five different solutions this is going to be a major impact on whether one can apply for any of these five and if you should get a case study within the exam which might uh have a specific amount of borrowing then that will determine whether each of these are suitable so with an informal payment plan there is no minimum amount of borrowing that said the maximum is limited to an amount that can be paid back over a reasonable amount of time so somewhat OB subjective the minimum is usually £5,000 with a debt management plan once again the maximum is limited to the amount that can be paid back within a reasonable time debt relief orders the maximum is 30,000 ivas the minimum is 10,000 but has no maximum and with bankruptcy there is no minimum or maximum amount of total debt did the debts get discharged essentially do the debts get um taken away well with an informal payment plan only after full repayment and that's the same with a debt management plan but with a debt relief order your debts are discharged in full after 12 months ivas after 5 years and once again bankruptcies after 12 months are your assets affected essentially are your is your car your house or other items of value affected well with an informal payment plan debt management plan and debt relief order no your assets are not affected with an Iva you'll have to pay any savings into the Iva at the outset so when you apply for the Iva and you may have to use any available equity in a property to pay debts off with bankruptcy often seen as the most severe of these five all nonessential assets will be sold to help pay off the debt homeowners have to sell their homes so a very serious solution is there any restrictions placed on the deta I.E the individual who has got into this unmanageable debt with an informal payment plan and a debt management plan no there are no restrictions but if applying for a new loan if you have a debt relief order the individual must tell the lender about the drro you are allowed to keep a bank account but you are not allowed to have an overdraft with an Iva you may not be allowed to be an accountant or a solicitor and you cannot take out any new un secured credit with a bankruptcy it's similar to an Iva but you also only allowed a basic bank account and you will be barred from certain professions these include things like financial advisor for instance so what impact will there be on your credit history as mentioned earlier each solution will leave a negative Financial footprint on a credit record for 6 years as this is the amount of time that a credit reference agency holds information on individuals for so what are the different cultural perceptions of financial products well people from different backgrounds will view borrowing products and debt differently some people have no concern at all about getting into debt or some may wish to avoid it at all costs under Islamic law for example Shia prohibits the paying and receiving of Interest someone's perception of debt can quite easily change over their lifetime as well they might marry into a different culture which might change the perception of debt they might experience financial hardship which might mean that they might manage their money in a different way within the future they might also be affected by economic factors the credit grunch and recent interest rate Rises are both examples of this so now that we've looked at topic five of unit 3 Let's check our knowledge but before we do so make sure you smash that like button and hit subscribe so you're notified of any future video releases including case study reviews and model answers which of the following would usually charge the lowest rate of interest is it a credit card a payday loan a personal loan or a store card the answer of course is c a personal loan would usually charge the lowest rate of interest out of those four options which of the following is a credit reference agency a Experian B Money dashboard C step change or D Zopa the answer to question two of course is a Experian is a credit reference agency which of the following Debt Management Solutions does not have legal and administrative fees a bankruptcy B debt relief order C ivas or D informal payment plans the answer is D an informal payment plan does not have any legal and administrative fees make sure you click on the link to access the next video in the series