Misunderstanding financial terms and conditions – or simply not reading them at all – is hitting UK adults in the pocket, research from the Money Advice Service reveals.
Its study of 3,000 UK adults demonstrated that confusion around financial terms and conditions in the last 12 months cost each UK adult £428 – some £21bn nationally.
Jane Symonds, a money expert at the Money Advice Service, said: “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.”
The vast majority of UK adults (84%) admit that they do not read the full terms and conditions when they take out financial products.
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%).
Common abbreviations used by the financial industry also led to confusion, with many people unsure what the key acronyms mean:
Six out of 10 could not identify what EAR stands for (Equivalent Annual Rate); three out of 10 could not identify what APR stands for (Annual Percentage Rate) and two out of 10 could not identify what ISA stands for (Individual Savings Account).
The study also 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 believing there is no obligation to pay a loan back.
Among this group, seven out of 10 could not identify the meaning of ‘interest’ while just less than that could not identify what APR stands for. Consequently, one in ten 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.
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 were left unable to pay household bills.