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Reasons for High-Income Household Borrowing More

Explain the reasons why a high-income household may borrow more than a low-income household.

Category:

Firm Behavior and Strategies

Frequently asked question

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Answer

Use clear and concise language to communicate your ideas effectively.

High-income households may borrow more than low-income households due to several reasons:
➡️1. Favorable Lending Conditions: Banks and financial institutions may be more willing to lend to high-income households. These households often have a stronger credit history, higher credit scores, and a more stable income, which increases their chances of loan approval. Lenders perceive high-income households as lower-risk borrowers, making it easier for them to secure loans.
➡️2. Access to Lower Interest Rates: High-income households may have access to loans with lower interest rates due to their higher income and borrowing capacity. Banks may offer more favorable loan terms, such as lower interest rates or longer repayment periods, to attract high-income borrowers. This allows them to borrow larger amounts at a lower cost compared to low-income households.
➡️3. Financial Stability and Repayment Capability: High-income households generally have higher disposable incomes and greater financial stability. They are more likely to have secure employment, steady income streams, and a higher capacity to repay loans. Their confidence in their ability to repay the loan quickly and the expectation of rising income can motivate them to borrow larger amounts.
➡️4. Collateral and Assets: High-income households often possess significant wealth and assets, such as real estate, investments, or other valuable properties. These assets can serve as collateral for loans, providing lenders with reassurance and increasing the borrowing capacity for high-income households.
➡️5. Affluent Lifestyle and Investment Opportunities: High-income households may borrow to finance big-ticket items or luxuries that enhance their quality of life, maintain their status, or pursue investment opportunities. Examples include buying expensive homes, luxury vehicles, funding higher education for their children, or investing in business ventures. Their higher income levels make it more feasible for them to take on larger loans for these purposes.
It is important to note that borrowing behavior can vary among households, and individual circumstances play a significant role. While high-income households may have greater access to credit and borrowing capacity, factors such as personal financial responsibility, risk tolerance, and economic conditions also influence borrowing decisions.

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I. 🍃Introduction
- Definition of high-income households
- Importance of understanding why banks may be more willing to lend to them

II. Banks may be more willing to lend to high-income households
- Explanation of why banks may be more confident of being repaid
- Discussion of how banks may charge a low interest rate for larger loans
- Explanation of why high-income households may be more confident of being able to repay the loan quickly

III. High-income households may have significant wealth/assets
- Discussion of how high-income households may be able to offer collateral
- Explanation of how this may make banks more willing to lend to them

IV. High-income households may borrow for big-ticket items/luxuries
- Examples of big-ticket items/luxuries that high-income households may borrow for
- Discussion of how this may increase/maintain status/living standards

V. 👉Conclusion
- Recap of why banks may be more willing to lend to high-income households
- Importance of understanding the reasons behind this lending behavior

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Logical explanation which might include: Banks may be more willing to lend to them - more confident of being repaid -. Banks may charge a low interest rate - as a high-income household may borrow a larger amount -. High-income households may be more confident of being able to repay the loan / able to repay the loan quickly - may expect income to rise / have greater job security -. High-income households may have significant wealth / assets - able to offer collateral -. High-income households may borrow for a big-ticket items/luxuries - e.g. to buy an expensive house, expensive car, to pay for children’s education / to increase/maintain status / living standards -.

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