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Topic outline

 

  • Time: 8 hours
    Level: Introductory

 
 

Introduction

  • Introduction Resource
  • Increasingly, debt has become a part of everyday life in the UK and, as a result, discussion about levels of personal debt made headline news throughout the mid 2000s. The amount of personal debt carried...
 

1 Exploration of debt

  • 1.1 Debt: concepts and evidence Resource
  • Let's start by examining exactly what is meant by the idea of ‘debt’. Assets are things that people own at a point in time. By contrast, a debt is a liability. Liabilities are effectively the opposite...
  • 1.2 Trends in debt Resource
  • One trend in the early part of the twenty-first century is for people to increase the level of secured debt by increasing their mortgage debt. This phenomenon has come about particularly in response to...
  • 1.3 Liberalisation in the financial services industry Resource
  • We've already touched upon the changing social and economic context by looking at the growth of debt in relation to income and the way that debt impacts upon different types of household. Yet there are...
  • 1.4 Structure of the financial services industry Resource
  • The UK financial services industry is dominated by the banks. This has become much more the case since the conversion of most of the large building societies to banks in the 1980s and 1990s. These and...
 

2 Debt costs

  • 2.1 Some basics of debt and interest Resource
  • When someone acquires a debt, the money that they will have to repay to the lender will consist of three different elements. Let's briefly introduce each of these in turn.
  • 2.2 The official interest rate Resource
  • In the UK, the official interest rate is set monthly by the Bank of England, as explained in Box 2.
  • 2.3 More on interest Resource
  • Let's look at interest payments in more detail. We can return to the car loan I mentioned in Section 2.1. If £10,000 is borrowed and no repayments of this principal sum are made during the year, and the...
  • 2.4 Annual Percentage Rate (APR) Resource
  • You have seen that borrowers have to repay both the principal sum and interest to the lender, and that the interest charge may be fixed, variable or capped. On top of this, there are often extra costs....
  • 2.5 Interest rates and individuals Resource
  • You saw in Box 2 that the Bank of England determines the official interest rate. Yet this is not the interest rate that will be charged to individuals taking out different types of debt. Lenders will tend...
 

3 Debt and household finance

  • 3.1 Income and expenditure, and debt Resource
  • In Section 3, we introduce the model of income and expenditure flows changing over time. This will enable us to investigate how debt fits into the overall picture of household finances.
  • 3.2 Liabilities and expenditure Resource
  • As you saw in Section 1.1, debts are liabilities: a stock of money owed at a certain point in time. Such liabilities include long-term debt, such as a mortgage, as well as short-term debts, such as an...
 

4 The borrowing process

  • 4.1 How to finance a purchase Resource
  • In the example in Section 3, the Syme family fell into debt due to some unexpected circumstances. Section 4 uses an example of someone deciding to take out a debt in order to work through the issues involved...
  • 4.2 Which debt product? Resource
  • Philip may or may not have been thinking through all of the issues discussed above, but we have assumed that he is going ahead and wants to fund the purchase by taking out debt. Philip will then need finance,...
  • 4.3 Tackling problems with debt Resource
  • Let's return to the financial planning model and financial capability. The financial planning model can be applied to the process by which individuals like Philip decide upon a generic type of debt product...
 

5 Conclusion

  • 5 Conclusion Resource
  • This unit has explored personal debt within the UK. In Section 1, we examined overall levels of debt before going on to explain how debt affects different households in different ways. Specifically, low-income...
 

References and Acknowledgements

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