British adults believe they have lost £428 per person by failing to understand financial jargon and small print

3rd September 2014

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The British public believes that misunderstanding financial terms and conditions cost an average of £428 per person in the last 12 months or a staggering total for the adult population of £21billion.

The government backed and industry funded Money Advice Service carried out a study of  3,000 UK adults asking them to estimate how much they had lost.

The vast majority of UK adults (84%) admit that they do not read the full terms and conditions when they take out financial products. MAS says this is compounded by many people misunderstanding key financial terms.

The meaning of ‘interest’ was misunderstood by 32% of respondents, and the meaning of a ‘budget’ was not correctly identified by an additional 32%. ‘Compound interest’ was the most commonly misunderstood term with 46% unable to correctly identify its meaning, followed closely by ‘annuity’ (44%).

Short but not simple

MAS says that common abbreviations used by the financial industry also led to confusion, with many people unsure what the key acronyms mean:

–       61% could not identify what EAR stands for (Equivalent Annual Rate)

–       30% could not identify what APR stands for (Annual Percentage Rate)

–       22% could not identify what ISA stands for (Individual Savings Account)

Payday loanees struggling the most

The study showed that 15% of UK adults have taken out a payday loan.  And over half (52%) of these borrowers could not correctly identify the meaning of a ‘loan’ – with nearly one in five (18%) believing there is no obligation to pay a loan back.

Among this group, 68% could not identify the meaning of ‘interest’ while 64% could not identify what APR stands for.  Consequently, one in ten (10%) have had to turn to unregulated loans such as loan sharks to pay off existing debts. This group has also been hit the hardest by misunderstanding financial terms, with the average cost of this being £1,405 in the last year alone.

Knock-on impact

The knock-on impact of being out of pocket due to misunderstanding or not reading terms and conditions was that 6% missed out on a holiday, 4% had to move home to their parents, and an additional 4% had to take on an extra job. Of those who had taken out payday loans, 13% had to move home to cope with the cost of misunderstanding financial terms and one in ten (9%) were left unable to pay household bills.

Responding to the findings, Jane Symonds, a money expert at the Money Advice Service, says: “Reading and understanding the terms and conditions of a financial product can seem long and unnecessary, but if you don’t, you may end up incurring unexpected penalties and possibly even impact your credit score.

“There are many ways in which you can lose money by not properly understanding terms and conditions. Early  repayment charges on loans and mortgages are a common financial headache, and many people fall foul of penalties for taking savings money out early from long term saving accounts, or incur late repayment charges on credit cards.

“Our financial decisions can be life-changing, and if you misunderstand what you’re signing up to, it could haunt you for many years to come. So take time out to fully understand what you’re agreeing to, and visit  the Money Advice Service website where we have plenty of tips to help you get to grips with various terms and conditions. We even have a jargon quiz (www.moneyadviceservice.org.uk/tools/do-you-know-your-ear-from-your-elbow) to test if your own knowledge of financial terms is up to scratch.”

How MAS calculated the estimated loss

Research conducted by One Poll for The Money Advice Service in August 2014 among 3,000 UK adults

*The survey asked people how much they believed misunderstanding financial terms in the last year had cost them. The average cost was £427.90. Collectively this equates to £21bn (49,122,174 adults (derived from 2010 ONS Population tables) multiplied by £427.90 = £21,019,378,255).

 

Key statistics for Scotland, Wales and Northern Ireland

Scotland

–       Average cost of misunderstanding financial terms in last year – £384

–       Do not read full terms and conditions when purchasing financial products – 83%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 27%

–       Could not identify what APR stands for – 25%

Northern Ireland

–       Average cost of misunderstanding financial terms in last year – £1,014

–       Do not read full terms and conditions when purchasing financial products – 81%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 38%

–       Could not identify what APR stands for – 39%

Wales

–       Average cost of misunderstanding financial terms in last year – £163

–       Do not read full terms and conditions when purchasing financial products – 88%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 33%

–       Could not identify what APR stands for – 31%

Key statistics for English regions (all stats in main release available for these areas upon request)

East Anglia

–       Average cost of misunderstanding financial terms in last year – £167

–       Do not read full terms and conditions when purchasing financial products – 83%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 27%

–       Could not identify what APR stands for – 32%

East Midlands

–       Average cost of misunderstanding financial terms in last year – £475

–       Do not read full terms and conditions when purchasing financial products – 87%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 29%

–       Could not identify what APR stands for – 25%

London

–       Average cost of misunderstanding financial terms in last year – £878

–       Do not read full terms and conditions when purchasing financial products – 82%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 39%

–       Could not identify what APR stands for – 38%

North East

–       Average cost of misunderstanding financial terms in last year – £419

–       Do not read full terms and conditions when purchasing financial products – 86%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 38%

–       Could not identify what APR stands for – 33%

North West

–       Average cost of misunderstanding financial terms in last year – £341

–       Do not read full terms and conditions when purchasing financial products – 84%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 31%

–       Could not identify what APR stands for – 26%

South East

–       Average cost of misunderstanding financial terms in last year – £128

–       Do not read full terms and conditions when purchasing financial products – 87%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 23%

–       Could not identify what APR stands for – 22%

South West

–       Average cost of misunderstanding financial terms in last year – £295

–       Do not read full terms and conditions when purchasing financial products – 83%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 34%

–       Could not identify what APR stands for – 27%

West Midlands

–       Average cost of misunderstanding financial terms in last year – £531

–       Do not read full terms and conditions when purchasing financial products – 83%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 34%

–       Could not identify what APR stands for – 34%

Yorkshire and the Humber

–       Average cost of misunderstanding financial terms in last year – £169

–       Do not read full terms and conditions when purchasing financial products – 82%

–       Couldn’t correctly identify the meaning of a ‘budget’ – 33%

–       Could not identify what APR stands for – 29%

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