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Consumers Fail To Get To Grips With Financial Jargon

Misunderstanding financial jargon costs consumers an average of £428 a year – and most don’t understand everyday financial terms.

Almost 90% of consumers confessed they did not bother to read the terms and conditions of a loan or other financial product, according to research by the government’s free Money Advice Service.

The study quizzed consumers who had recently taken out financial products and came up with some startling answers:

  • 84% did not read the terms and conditions of the loan
  • 50% did not know what a loan was
  • 68% could not explain what interest was
  • 32% failed to define how a budget worked
  • 46% could not explain compound interest
  • 44% did not know how an annuity worked

Many also had a complete lack of understanding about acronyms used in the financial industry.

  • 61% had no idea what EAR stands for (Equivalent Annual Rate)
  • 30% did not know what APR means (Annual Percentage Rate)
  • 22% failed to identify what ISA stands for (Individual Savings Account)

Surprisingly, 15% of consumers in the study had borrowed money with a payday loan, but 18% believed they did not have to repay the cash.

Making mistakes

Failing to understand simple financial terms had a serious effect on some consumer’s lifestyle.

One in eight pay day loan borrowers had to move in with friends or family and one in 10 could not afford to pay their day-to-day bills because they did not realise the extent of their commitment or had not budgeted for the extra expense of repaying the loan.

Making mistakes about the terms and conditions of borrowing cost consumers between £428 and £1,405 a year, with payday loan borrowers losing the most money.

“Reading and understanding consumer obligations under the terms and conditions issued by a lender or financial firm is really important as people can let themselves in for financial implications that they may not have realised,” said Jane Symonds, a money expert at the Money Advice Service.

Unexpected consequences

“We see consumers having to pay unexpected bills because they have missed repayment dates or withdrawn money from fixed term savings accounts too early.

“Not reading and understanding the small print can make life difficult for people many years later and impact on their credit scores. Some even end up losing their homes.”

Symonds recommends anyone unsure about their finances should go to the Money Advice Centre web site for help.

Test your financial knowledge with the Money Advice Centre quiz

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