Unit 31

Assignment 1

Impacts of personal debt

Debt-

Debt is simply the amount owed by the borrower to the lender. Debt is a sum of
money borrowed for a certain period which then is repaid with interest, this is
dependent on the borrowers' credit rating, the borrower has a good credit rating
the interest rates would be low but if it's bad credit rating the interest rate will
be high. The average Uk personal debt per household including mortgages was
calculated to be £65.914, per adult it was £34.636, 106.5% of average earning.

The major reason why debt levels rise is because people must make unplanned
payments for things like unanticipated repairs or necessary purchases. For
instance, if a person needs money for an urgent automobile or home repair but
doesn't have any savings, they will have to turn to a lender for financing and will
find it difficult to pay them back because they never had the money to begin
with, which would trap them in a cycle of debt. Another factor, though, might be
the unanticipated global pandemic that struck and prevented people from going
to work to earn money or even forced firms to permanently close.

Impact on families

People can be impacted by debt in a variety of ways, including intellectually,

physically, and emotionally.

As a result, it may be the primary reason for tension in one's relationships with
oneself and others.

Debt-related stress and anxiety can make people defensive and pessimistic,
which can lead to disputes with their loved ones and a persistently negative
frame of mind that can be as risky as self-harm. Because of all the stress,
mental health problems can result. This brings up the physical impact that debt
can have on a person; they may feel physically and mentally worn out, have
trouble sleeping, which may make it difficult for them to carry out their daily
activities.

Effect on society

Because consumer spending depends on people having enough money to pay for
extras, they don't consider necessities, it will decline if the level of debt keeps
rising and people don't have the money to spend. This will have an impact on
society.

As a result, the economy will be impacted since fewer individuals will be

spending money. If interest rates are too high and income is too low, these are
two factors that can have an impact.

Forms of debts:
Personal loans- personal loans are unsecured loans this loan is known as a
consumer loan; this loan can be taken out for anything such as for personal
needs investing in businesses. The average interest rate for personal loans is
10.6% as of January 25th, 2023. However, the interest rate is also depended on
the individuals credit rating, if the individual has a poor credit rating the interest
rates would high but if the credit rating is good the interest rates would be
normal. The three main types of lenders for a personal loan are online lenders,
Banks, and credit unions.

Hire purchase secured loan

Hire purchase loan is a credit agreement, an individual hires for example a car
and then pay for it in monthly instalments and the car is not owned by the
individual until it all gets paid off, if the individual fails to pay the monthly in
time the car gets taken away from the company. An individual can finance a car
from a car dealership. The average interest rates for hire purchase are 4 to 8%
and the individual needs to leave a deposit they if the person can't pay back and
miss many monthly payments the company that got the individual the car for
hire will repossess the car and the individual will be left with no car.

Student loans unsecured loan

Student loans are the loans that students take out for education for example
university students people go to universities across the world and they will need
the finance because universities are expensive specially for international
students that comes to between £12.000 to £28.000. Because of the high
university fees students get students loans and the loan gets paid back with
interest over 30 years after the studies finish. Loan repayment would be
automatically taken out the individuals bank account monthly, till the loans is
fully repaid. The interest rates for students that earn £27.925 and below yearly
are 1.5% and the interest rates for people than earn more than £49.130 yearly
are 4.5% as of March 2022.

Total household debt and the debt-to-income ratio grew slowly during the
coronavirus pandemic. Growth was driven by growth in mortgage lending but
was slowed by repayments of unsecured consumer debt. The debt-to-income
ratio was 134% between 2021 and 2022.

Unmanageable debt

Personal debt can be Unmanageable when the required payments cannot be met
from normal income streams. This is when an individual gets into high level of
debt and is not able to pay in full and they own much more money than normal.
Unmanageable debt causes the financial status to go poor and it breaks
relationships in the family, it causes stress which impacts on the mental health
and physical health. High levels of debt can cause a person to lose their house
nearly all their belongings to cover the debt this can lead to an individual to
become homeless. Depressed and even commit suicide.

Being in debt has several drawbacks, including the worry and uncertainty it can
cause, as if one had to claim they were unable to repay the obligation, they
might be forced to declare bankruptcy, either on their own or at the court's
order. This will have a significant impact on their credit rating and remain on
their record for 6 years, making it very challenging for them to obtain a loan or a
mortgage on a home. A further factor is that risk increases with debt level. As a
secured loan, if a person has taken out a mortgage and hasn't been able to
make payments,

The disadvantages of debt on an individual, it impacts the individual in every

way possible for example, the individual can lose the house, personal belongings
relationships can be ruined there can be divorces if the individual cannot provide
for the family this leads to loneliness, this leads to depression anxiety losing the
reason to live and suicide at the end. The disadvantages of debt on society
Because consumer spending depends on people having enough money to pay for
extras, they don't consider necessities, it will decline if the level of debt keeps
rising and people don't have the money to spend. This will have an impact on
society.

Lifestyle choices can lead to high levels of debt, for example if an individual lives
a luxury life off loans and don’t spend money correctly and spend money on
irrelevant things can lead the individual to have high levels of debt. If an
individual use the money for good causes and spend carefully within the limit, it
would be a lot easier to repay debt.

The Financial Conduct Authority, or FCA, is a body that collaborates with the UK
government to make sure that companies and organisations are being fair and
honest when they sell their products. They assist in protecting consumers, but
they also serve as a resource for debt counselling for those who have borrowed
money through personal loans. They also assist in developing strategies and
plans to help someone get out of debt.

P2

There are numerous elements that can be regarded as economic factors, but
there are four primary stages that can be used to assess the current status of
the economy. The first stage of the economic cycle, Interest rates are frequently
low throughout the expansion phase, which makes it simpler for people and
businesses to borrow money. Businesses start to increase production to keep up
with rising customer demand for consumer products. Businesses can boost
productivity by hiring more employees or by spending money to develop their
physical facilities and operational capabilities. Corporate profits typically start to
increase along with stock prices.

The second phase of the economic cycle is the peak, the economy's growth rate
has reached its maximum at this point. There comes a time when firms may no
longer be able to increase production and supply to keep up with rising
consumer demand. Some businesses could find that they need to increase their
manufacturing capacity, which requires additional spending or investment.
Additionally, businesses can start to see an increase in production expenses
including wages.
The third phase is the contraction, Then the economy starts to contract. At this
point, consumer spending on luxury and luxury items starts to decline along with
business earnings. The value of stocks also decreases as investors switch their
money to "safe" assets like Treasury bonds and other fixed-income assets, along
with plain old cash. The decline in spending results in a reduction in GDP. To
keep up with declining demand, production slows. As businesses suddenly stop
hiring or use layoffs as a last resort, employment and income can also drop. A
recession usually follows a general slowdown in economic activity and the onset
of a bear market in equities. While some recessions are modest, others, like the
Great Depression, are exceptionally severe and protracted. During a depression,
a lot of firms permanently close.

The fourth and last economic phase is recovery, When the economy reaches its
low point, bottoms out, and restarts the cycle, that is when the recovery phase
begins. Regulations put in place during the contraction phase start to pay off.
Businesses that cut staff during the contraction start to build up once more.
Investors' perception that equities have better potential returns than bonds
cause stock values to rise. When production increases to meet rising consumer
demand, so do business growth, employment, income, and Gross domestic
product.

GDP

Gross Domestic Product, or GDP, is the method used to determine the value of
products and services. It is crucial because it plays a crucial role in measuring
the growth rate, which informs the government as to what stage of the
economic life cycle we are currently in.

The general rise in prices is known as inflation. A decline in the economy might
result from excessive inflation since fewer people will have the money to
purchase more goods and services, and if the value of money rises too much,
the currency will become disposable and worthless. This is a result of too high
product and service demand. Some recent examples of inflation are the prices of
petrol, diesel, gas and electric, these have significantly increased in price mostly
because of the was in Ukrain against Russia. With a consumer price index of
9.1%, the current inflation rate is at its highest level in more than 40 years.

CPI

The CPI stands for consumer price inflation, which the government uses to
gauge progress towards its overall inflation objective. The economy as a whole is
one of its variables since it helps determine whether the value of pensions,
salaries, and other benefits should be raised. If they are, it aids people
monetarily and encourages the economy to enter the expansion stage. However,
if done excessively, it can also result in a bad descent into the recession or
trough period.

Physical and monetary policies

The primary responsibilities of fiscal and monetary policies are to affect demand
and spending in the economy. The primary tasks of monetary policies are to
determine the level of interest rates and if they need to be changed. If more
need to be printed, they also have a significant impact. However, one of the
main responsibilities of the fiscal department is to change tax rates. If the
amount of government expenditure has a beneficial impact on the economy, this
is another important economic aspect.

What is consumerism and how can consumerism effect the economy

The impact of a person's lifestyle decisions on their debt is significant, since
someone who wants to lead a high-end luxury lifestyle may be ready to incur debt in
order to do so or purchase the item. However, it will assist prevent them from going
into debt if a person is more responsible and will only purchase those products if
they can afford to do so. An individual must maintain debt since only then will they be
able to accumulate the funds necessary to spend on more luxurious items. If a
person tends to purchase the same items frequently, it may be beneficial for them to
practise consumerism, which is another lifestyle decision that can help them
maintain financial stability.
Are the government helping with the rising costs
The government also pledged £400 off energy bills for all households in 2022.
households receiving means-tested benefits will get payments of £650. Families with
pensioners will receive an extra £300, and those receiving disability benefits would
receive an extra £150.
What is happening to the cost of living and to wages in real terms
Within the welfare system, the Government is maintaining the increase to Local
Housing Allowance rates for private renters on UC and Housing Benefit in cash
terms in 2021- 22 and then in 2022-23. This increase was worth over an extra £600
on average in 2020-21 for more than 1.5 million households.
Case Study Lehman brothers

On September 15th , 2008, one of the fourth largest investment banks were
forces to declare their bankruptcy, the Lehman Brothers the owners of the bank
had a major loss of a total $10 trillion in lost economic output all due to the
cause of the 2008 financial crash. The Lehman brothers' landed five mortgage
lenders and their first one being in the early 2000s. In which one of the
mortgages specialising Alt-A which is classes as a premium which tends to be
more expensive for the borrower than a regular mortgage as well as the fact
that there are higher risks. However, there are fewer documents to require one
people with lower credit score tend to go for this option as they don’t look at
credentials. This resulted in the Leham Brothers stipulated more mortgages-
backed securities than any other businesses in 2007, thus then making a
lumpsum of $86 billion portfolio.

https://corporatefinanceinstitute.com/resources/economics/economic-cycle/

https://thebusinessprofessor.com/en_US/economic-analysis-monetary-policy/
economic-cycle-definition

Moodle coventry college unit 31 lesson 1 to 10