Week 4: Debt and borrowing

Introduction

The UK’s mountain of personal debt. Are there ‘good’ and ‘bad’ debts? How the Bank of England sets interest rates. Interest calculations – simple and compound. How does inflation affect the cost of borrowing?

Martin welcomes you back to tackle debt, interest and inflation.

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Transcript

Martin Upton

Hello again!

So far, this course has focused on the income and expenditure cash flows of individuals and households. This week will look at how people can use debt to finance their expenditure, and the costs associated with it.

Debt arises when we borrow money, and borrowing can take many forms - from credit cards and bank overdrafts to student loans and mortgages. It can be used to finance everything from day-today spending (you'll no doubt be aware of the growth in recent years of 'payday' loans) to holidays and items that we use over a number of years like furniture, cars and, of course, our homes.

The huge growth in the value of personal debt in recent decades has fuelled arguments about whether UK households are over-indebted and even about the morality of the lenders - the banks, the building societies and the finance houses - who have enabled this build-up of debt.

As personal debt in the UK has nearly quadrupled over the last twenty years to nearly 1.5 trillion pounds, it's important to identify the sources of debt, and whether those debts are 'good' or 'bad'.

As you work through this week, you'll examine the cost of debt - the interest we pay on our borrowings and what determines the level of interest rates we pay. Getting to grips with these factors is an essential aspect of financial planning.

The country has an array of financial advice agencies, and most of their work is tied up with people who have got into problems with their debts, with sometimes dreadful consequences for their lives. Don't be one of those, folks.

Have a great week.

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This course is presented with the kind support of True Potential LLP.

The True Potential Centre for the Public Understanding of Finance (True Potential PUFin) is a pioneering Centre of Excellence for research in the development of personal financial capabilities. The establishment and activities of True Potential PUFin have been made possible thanks to the generous support of True Potential LLP, which has committed to a five-year programme of financial support for the Centre totalling £1.4 million.