Week 5 Discussion Answers

1. The five C’s of credit are

• Capacity

This is based on the household income and expenses. The lender assesses the household cash flow to determine the capacity to repay the debts.

• Capital

This is the total worth of an individual’s assets. Lenders will be interested to know if the total assets are greater than the debts since a person with a high capital is less likely to default on repayments

• Collateral

This is something which a person can use as a guarantee that they will repay the loan. The more valuable a collateral is the better the lender likes it

• Character

This gives the lender an idea about how likely an individual is to repay his loan. The lender takes into account details like credit history, how long the person has lived in a certain area, if they have a house and job etc

Conditions

The lender takes into account a lot of facts when approving a person for a loan. This is to make sure that the person is more likely to repay the loan and not default

2. Edwina should take out a loan to buy the car. If she uses her savings to pay for the car it will leave her with little money. Even though loans have an interest she will have money on hand in case of an emergency where she cannot borrow. Moreover taking a loan will help Edwina get a good credit rating by repaying her loan since she has the money to make repayments.

3. There are three ways to buy something

• Using current cash flow

• Taking money from savings

• Taking a loan and repaying it later

For a person using consumer credit for their purchase, there are two types of credit available. These are Closed-end credit and Open-end credit

4. An advantage of credit is that it is convenient and that a consumer doesn’t have to carry large amounts of cash on him. For average families credit is the option to manage major purchases such as houses, cars or education fees....