Household Debt and Financial Planning Analysis - Finance Assignment

This finance assignment analyzes household debt trends in the UK, focusing on consumer credit, personal contract plans (PCPs), and their implications. The assignment begins with a personal tax calculation for Antonio, and then examines the financial planning challenges faced by Claire and her family. It explores various borrowing options, including those for home improvements, and discusses the risks associated with increased debt. The assignment further delves into the reasons behind long-term increases in household borrowing, analyzing the impact of consumer credit, car finance, and payment protection insurance. It highlights the potential problems such debts pose for different households and provides a comprehensive overview of the current financial landscape. The assignment utilizes various sources and references to support its analysis, offering insights into the complexities of household finance and the importance of financial planning.

OID-727914 - FINANCE
Part - A
ANSWER – 1 (a)
Source: https://goodcalculators.com/tax-calculator-2017/
Antonio’s Tax Calculation
Salary shown in the table above is Antonio’s GROSS salary before deduction of Income
Tax and National Insurance. Personal Allowance is the amount allowed as “Tax Free”
basis to each taxpayer and is fixed for each income year, says Collings, (2015).

Antonio’s tax has been calculated after first deducting the ‘Personal Allowance’ then
the personal insurance amount and income tax has been calculated on the remaining
balance.
Antonio gets £32,000 per annum as gross salary and his Personal Allowance is £11,500
per annum. After deducting the personal allowance, his Gross Taxable Income is
£18,500. Since Antonio has not reached state pension, he is liable to pay only National
Insurance Contributions (NIC), asserts PWC, (2013). After deducting the income tax
and NIC, Antonio’s final “Take Home Amount” is £25,039.68.
ANSWER – 1 (b) (i)
Expected expenditure of Claire’s household as a single parent: See TABLE – 1 in
Appendix.
ANSWER – 1 (b) (ii)
So far Claire has been managing her house and her daughter Lulu on her own terms and
within the amount of money that she earns on her own. Entering into a relationship and
then start a life in which Claire will have to share not only her earnings, but also her
personal space and also her daughter. Lulu has been accustomed to sharing her living
style, her personal space and her relationship with just two persons – her mother and her
grandmother, explains Wanjialin, (2004). After moving in with Antonio, her living style
will also undergo lot of changes as she will now have to share her living style, her
personal space and her relationship with Antonio too. Similarly, Claire’s mother will
also have to make adjustments after Antonio joins in as a family member, asserts
Rowes, (2004). In fact, Antonio will have to adjust his living style, his personal space
and his relationship, to a large extent, with Lulu and her grandmother along with sharing
everything that was so far the exclusive domain of Claire’s small family, explian Miller
& Oats, (2012). Another big change, and that is the financial change, which the new
family of four people (Antonio, Claire, Lulu and Grandmother) will have to adjust is the
“Cash Crunch”. From Table-1 & 2 it is evident that after they start living together and
do not bring about a change in the shown living expenses, the family will be facing a
“Cash Shortage” of £116.70 every month, as detailed by Macleary, (2003).
ANSWER – 1 (c)

They expect their expenditures in the new shared home to be as follows: See TABLE –
2 in Appendix.
ANSWER – 1 (d)
It is advisable for Claire and Antonio to plan their monthly expenditure and to include
everything, from transportation to household expenses. It is essential to include periodic
expenses, such as property taxes and insurance payments. Credit counsellors advise that
a household must save a minimum of £100 per month, i.e. 10% from every pay-check
until one reaches the goal. However, Claire and Antonio must aim for those saving
schemes that offer the best return rates. The three most essential areas in which the
couple must contribute their savings are - for emergency; retirement and savings for
contingencies, as per Tiley & Loutzenhiser, (2012).
The three most likely expenses from where the couple can wipe out the monthly deficit
of £116.70. These are, Rent; Council Rates; Annual Holidays. If they shift to a low rent
home, council rates will automatically come down. A cut of £250 in rent will reduce the
council rate by £50 and a cut of £1000 in annual holiday cost will help in saving £100
per month. These three cuts will help in savings of £400 per month. A small adjustment
of £50 in household expenses will help in covering the £117 deficit and also help the
couple in saving £300 per month for emergency and contingencies, says Rolfe, (2005).
ANSWER – 2 (a)
In case Rasheed takes Option – A, he will have to pay £190 every month for 2 years for
clearing the amount of £4,500 to the national firm with APR of 0%.

ANSWER – 2 (b)
In case Rasheed takes Option – B, he will be paying £120 every month for 3 years for
clearing the amount of £4,000 to the Local firm with APR of 5.20%.
ANSWER – 2 (c)
In case Rasheed takes Option – C, he will have to pay £50 every month for 3 years for
clearing his borrowing of £3,000 at an APR 0f 20%, for using the local firm which shall
charge the amount of £4,000 for building the second bathroom.

ANSWER – 2 (d)
Table 2
Monthly Payment Option Repayment Period Total Cost of the Bathroom
Option A 2 years £4,500
Option B 3 years £120 / month for £4,000
Option C 3 Years £50 / month for £3,000
Monthly Payment Option Advantage Disadvantage
Option A Satisfactory Quality;
Least Re-Payment
Period; 0% APR
High Cost of Construction
Option B Lower Cost resulting in
savings of £500
Local Firm may not give long-
lasting quality; High Borrowing
Cost from Bank
Option C Lower Cost resulting in
savings of £500
Investment of Own Funds; Very
high APR of Credit Card
ANSWER – 2 (e)
The big risk to which Rasheed is exposing himself is the assumption that the value of
the house will appreciate by 6% if he adds the second bathroom. With the “Cash
Crunch” already hitting the real estate market in UK, even if Rasheed is able to get an
appreciation for the second bathroom, the cost of investment would have depreciated,
explain Tiley & Loutzenhiser, (2012).

Part - B
Using the extracts given, discuss a range of reasons for a long-term increase in
households borrowing other than for house purchase and why such debts may be a
problem for some households but not others.
DISCUSSION
As on March 2012, total household debt in UK stood at £1,518.5bn, considered at
today’s prices, as compared to £1,630.1bn as on March 2017. This shows that in these
five years, UK’s household debt has increased by 7.3% after adjusting inflation. At this
rate, UK’s trade deficit, which is currently the largest among the G7 group of nations,
has shown such a big increase due to consumer spending which is increasing more with
each passing year, and the consumer spending trend is increasing because of spending
on imports and borrowing, as per Tiley & Loutzenhiser, (2012). Although the growth in
wages, after adjusting for inflation, is still ahead of spending by 0.7% in the same five
year period, more consumers are turning towards borrowings for buying essential items.

Annual Percentage Rate (APR)
Borrowers need to repay principal and interest to the lender. The interest charges can
either be fixed or variable or capped and then there are certain extra costs. All these are
now capped under Annual Percentage Rate (APR). Although some of the costs are
connected to the fees which the borrower is required to pay for obtaining a loan, some
charges are payable on repayment of the loan before the term of the loan ends, assert
Miller & Oats, (2012).
BORROWING SEGMENTS
(A) Household Borrowings
A recent survey of 4,000 people of age 18 to 30 years by The Young Women Trust
(formerly YWCA) has shown that 51% of the young women and 45% of the young men
are regularly borrowing to cover their finances till the next payday. This report has also
found that over 25% of UK’s young population remains continuously in debt. Three
different borrowing modes are most common among this segment of the society –
Credit Card (being used by 25%); Family & Friends (being used by 20%); Loan
Companies (being used by 25%) and the remaining 30% either skipped meals or
resorted to overtime working, as per PWC, (2013).
(B) Consumer Credit
Bank of England figures have shown that Consumer Credit has increased by 19% in
these past five years. The unsecured consumer credit has also jumped by 4.9% in the
previous year after adjusting for inflation. The total unsecured consumer credit too has
increased from £192bn in July 2016 to £201.5bn in July 2017, details Macleary, (2003).
(C) Car Finance
Finance being issued for new car loans by the car dealerships has doubled in these five
years. Loans for new car purchases have shown a big increase in recent years and is
driven by loans now being marketed as Personal Contract Plans (PCPs). Under these
plans, depreciation on a new car is covered in three to five years, and this is making the
cars cheaper for buyers based on monthly instalments. Even the amount of deposits are
very low, just £1,000 for a luxury BMW car valued above £20,000, says Rolfe, (2005).
Figures released by creditplus.co.uk state that a salaried youth needs to earn only
£13,500 to be able for a loan to buy a Mazda MX-5, a Japanese sports car which costs
above of £19,000. This would mean that the salaried youth should have minimum wage
of £7.50 / hour and work 40 hours / week for earning £15,600 a year. PCPs are luring

the young into debt by promising an AUDI TT, whose base model starts at £28,500, to a
person earning a salary of £20,000 annually, according to James, (2009).
Because of such facilities, PCPs have grown to over 86% of new car purchases, and this
calculation shows that more than 1 million cars are being bought under PCP every year.
Another criteria for the success of PCP is the rise in car-finance from dealerships, where
funds are being provided by car manufacturers. This is the reason why credit against
new car sales has more than doubled in these past five years, showing an increase from
£14.6bn in 2011 to £31.7bn in 2016, as detailed by Collings, (2015).
(D) Payment Protection Insurance
All this lending, at such easy terms and with the lack of transparency in lending is being
directed at today’s youth who may not be able to sustain their payments in case of a
downturn. This has led to experts in believing that such a rapid growth in PCP car loans
may be a repeat of the Payment Protection Insurance (PPI) scandal of the GFC. But the
industry is assuring the buyers that such lending to the salaried youth, who have poor
credit histories, is quite low and moreover the credit is being offered against an asset –
that is the car – which the lender can always repossess in case the borrower defaults in
payments, state Miller & Oats, (2012).
Conclusion
Debt has become a universal phenomenon, especially in the developed countries and is
fast catching up in the developing countries. Among the G8 Group of Nations, the UK
households are the second most indebted. It is the US and the UK which have fueled the
GDP growth with a huge increase in consumer debt during recent years. On the other
hand, the lenders have hoarded large amounts of liquidity and have the healthiest
balance sheets in the current times, as per Miller & Oats, (2012).
Continental European countries have been more circumspect in allowing household debt
to increase. Banks in Germany and France have been more reluctant to lend, though
partly in response to their own failure to deal with bad debts left overhanging from the
2008 crash. Just for comparison, Germany has a huge trade surplus, and a government
budget surplus with a buoyant corporate sector which is relatively showing very low
rate of borrowing among the salaried class youth, states Collings, (2015).

LIST OF REFERENCES
Collings, S. 2015, Interpretation and Application of UK GAAP. John Wiley & Sons,
West Sussex.
James, M. 2009, The UK Tax System: An Introduction. Spiramus Press Ltd, London.
Macleary, A. 2003, National Taxation for Property Management and Valuation. Taylor
& Francis, London.
Miller, A. and Oats, L. 2012, Principles of International Taxation. A&C Black, West
Sussex.
PWC. 2013, Manual of Accounting - New UK GAAP. A&C Black, West Sussex.
Rolfe, T. 2005, Financial Accounting and Tax Principles. Elsevier, Oxford.
Rowes, P. 2004, Taxation and Self-assessment: Incorporating the Finance Act 2004.
Cengage Learning EMEA, London.
Tiley, J. and Loutzenhiser, G. 2012. Revenue Law: Introduction to UK Tax Law;
Income Tax; Capital Gains Tax; Inheritance Tax, 7th ed. Bloomsbury Publishing,
Oxford.
Wanjialin, G. 2004, An International Dictionary of Accounting and Taxation. iUniverse,
Lincoln, NE.
APPENDIX
TABLE – 1
Particulars Amount Duration
of Amount
Annual
Amount
Annual
Amount
Rent £400.00 Per month £4,800.00 £400.00
Council tax £960.00 Per year £960.00 £80.00
Food and household items £100.00 Per week £5,200.00 £433.35

Water £80.00 Half yearly £160.00 £13.30
Gas and electricity £150.00 Per quarter £600.00 £50.00
Broadband, TV and phones £40.00 Per month £480.00 £40.00
Transport £120.00 Per month £1,440.00 £120.00
Gym, leisure, meals out,
babysitters
£50.00 Per month £600.00 £50.00
Holidays £1,000.00 Per year £1,000.00 £83.35
Other essentials £80.00 Per month £960.00 £80.00
TOTAL PER ANNUM £16,200.00 £1,350.00
Take-Home
Amount
Take-Home
Amount
Gross Income per Annum –
Claire
£18,000.00 £1,500.00
Total Annual Cash Out-Flow £16,200.00 £1,350.00
Surplus/(Deficit) Annual Cash
Flow
£1,800.00 £150.00
TABLE – 2
Particulars Amount Duration Yearly Amount Monthly Amount
Rent £1,400.00 Per month £16,800.00 £1,400.00
Council tax £1,600.00 Per year £1,600.00 £133.35
Food and household items £200.00 Per week £10,400.00 £866.65
Water £240.00 Half yearly £480.00 £40.00
Gas and electricity £400.00 Per quarter £1,600.00 £133.35
Broadband, TV and phones £80.00 Per month £960.00 £80.00
Transport £300.00 Per month £3,600.00 £300.00
Gym, leisure, meals out, babysitters £300.00 Per month £3,600.00 £300.00
Holidays £3,000.00 Per year £3,000.00 £250.00
Other essentials £200.00 Per month £2,400.00 £200.00
TOTAL PER ANNUM £44,440.00 £3,703.35
Take-Home
Amount
Gross Income per Annum – Claire £18,000.00 £1,500.00
Gross Income per Annum – Antonio £25,039.68 £2,086.65
Total Annual Cash In-Flow £43,039.68 £3,586.65
Total Annual Cash Out-Flow £44,440.00 £3,703.35
Surplus/(Deficit) Annual Cash Flow (£1,400.32) (£116.70)