R01 Budgeting and managing debt: free practice questions

1. Question 1 of 5

   What two key pieces of information does an adviser need to work out how much a client can budget for financial products?

   Option A: Net worth and credit scoreOption B: Income and expenditureOption C: Age and employment statusOption D: Assets and attitude to risk

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   The answer is B: Income and expenditure

   The difference between income and expenditure gives the client's disposable income. A full breakdown of each is needed to understand the budget properly.

   Why the other options are wrong

   A

   Net worth and credit score don't show how much spare income there is each month.

   C

   Age and employment affect needs, but don't by themselves show what can be afforded.

   D

   Assets and attitude to risk matter for investment advice, but the budget comes from income and expenditure.

2. Question 2 of 5

   An adviser's ideal recommendation would cost more than a client can comfortably afford. What approach does good practice favour?

   Option A: Recommend the ideal solution funded by a personal loanOption B: Recommend the ideal solution and let the client decide whether to cut back laterOption C: Recommend a partial solution the client can sustainOption D: Recommend nothing until the client's income rises

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   The answer is C: Recommend a partial solution the client can sustain

   It's better to recommend a partial solution the client can keep up than a perfect one they can't. Unaffordable plans tend to lapse, losing value for the client.

   Why the other options are wrong

   A

   Borrowing to fund financial plans adds cost and risk and isn't sustainable advice.

   B

   Plans the client can't keep up are likely to lapse, wasting what has been paid.

   D

   Doing nothing leaves needs unmet when a partial, affordable solution is possible.

3. Question 3 of 5

   Which of these is a warning sign that a client may be developing a debt problem?

   Option A: Building up an emergency fundOption B: Paying off their credit card in full each monthOption C: Overpaying their mortgage each monthOption D: Using credit to pay everyday bills

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   The answer is D: Using credit to pay everyday bills

   Using loans or credit cards to pay everyday bills, making only minimum payments, or borrowing without knowing how to repay are all signs of a developing debt problem.

   Why the other options are wrong

   A

   Building an emergency fund is sound financial practice.

   B

   Clearing the card in full each month is a sign of good control, not a problem.

   C

   Overpaying a mortgage suggests surplus income rather than debt difficulty.

4. Question 4 of 5

   Which of the following is NOT a reason for caution before recommending a debt consolidation loan secured on a client's home?

   Option A: It always increases the client's monthly outgoingsOption B: The client could lose their home if they fail to keep up paymentsOption C: Some providers charge high fees, including for early repaymentOption D: The total repaid over the term can be much higher, even if monthly payments fall

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   The answer is A: It always increases the client's monthly outgoings

   Consolidation often lowers monthly payments, which is its appeal. The concerns are higher total cost, high fees, the risk of running up new debts and, if secured, losing the home.

   Why the other options are wrong

   B

   Losing the home on default is one of the main dangers of a secured consolidation loan.

   C

   High fees, including early repayment charges, are a recognised concern.

   D

   A longer term can mean paying much more overall, which is a key concern.

5. Question 5 of 5

   A client in serious debt wants free, independent debt counselling. Which organisation could provide it?

   Option A: The Prudential Regulation AuthorityOption B: A commercial debt management companyOption C: StepChange Debt CharityOption D: The Financial Services Compensation Scheme

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   The answer is C: StepChange Debt Charity

   Free debt advice is available from organisations such as Citizens Advice, National Debtline, PayPlan and StepChange Debt Charity.

   Why the other options are wrong

   A

   The PRA is a prudential regulator and doesn't advise individuals.

   B

   Commercial debt management companies charge fees for their services.

   D

   The FSCS pays compensation when authorised firms fail; it doesn't give debt advice.

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