A household borrows money to buy a car. Which factor is most likely to have influenced this decision?
Question 1 Report
A household borrows money to buy a car. Which factor is most likely to have influenced this decision?
Answer Details
The correct answer is low interest rates making borrowing cheaper.
When interest rates are low, the cost of borrowing falls. Monthly repayments on a loan are smaller, making it more affordable for a household to finance a large purchase such as a car through credit. This encourages borrowing rather than waiting to save the full amount.
A rise in income tax reduces disposable income, making it harder to afford repayments, so it discourages borrowing. An increase in the price of petrol raises running costs of a car but does not directly make borrowing more attractive. A fall in disposable income would reduce the household's ability to make loan repayments, discouraging rather than encouraging borrowing.
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