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5 The borrowing process

3 years (36 months) 30.65 1103.40
5 years (60 months) 19.56 1173.60

Consequently, price, flexibility and length of term are all important factors in choosing a
debt product. This is all significant information needed in any financial planning process
about the taking out of debt. However, the notion of choice itself is influenced by the social
and economic circumstances of individuals such as Philip. As we saw in Section 2.1, low-
income groups have only limited access to mainstream finance: in fact, this is one of the
characteristics of financial exclusion. People who do not own their own home, for
instance, will not have the same access to secured lending as homeowners. This narrows
their ability to access the kind of low interest debt which is associated with secured
lending. Such individuals might, of course, choose not to borrow to fund a music system
purchase, but any borrowing they do undertake would most likely involve more expensive
forms of debt than homeowners can access.

Activity 8
The data below show some real-life interest rates for different products in a high-street
lender in August 2010. Given that the rate for the personal loan is substantially the
lowest, why might someone use any product other than a personal loan to buy the
music system?

Debt product Typical APR (%)

Overdraft 19.9
Personal loan 7.7
Credit card 16.9
Charge card 25.0

Comment
When choosing a debt product, many of the aspects you’ve seen in Box 6, and in
Section 5 generally, will be important, such as flexibility, convenience, the desired term
of repayment, and the price (the interest rate). Another factor that may influence
someone’s decision is how these different financial products are marketed. Therefore,
many factors other than the price will play a part in selecting the specific debt product,
and that is why the personal loan, which is the cheapest, may not always be the
product chosen.

5.3 Accessing debt products

A crucial factor in being able to access debt products is the credit standing of the
borrower. People with poor ‘credit scores’, even if they have relatively high incomes, will
have limited access to cheaper forms of debt. Most lenders ‘credit score’ loan applicants
before releasing money. Although the exact practices vary from lender to lender, the credit
score analysis can be broken down into four main areas:

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