Cost of not reading financial terms

Consumers estimate they are typically losing £428 a year by misunderstanding financial terms and conditions or simply not reading them at all, a Government-backed body has found.

About four in five (84%) of those surveyed admit they do not read the full terms when they take out a financial product such as a credit card
About four in five (84%) of those surveyed admit they do not read the full terms when they take out a financial product such as a credit card

People taking out payday loans tend to think they have suffered about double the average financial loss of the population generally by not getting to grips with the small print on products, according to the findings from the Money Advice Service (MAS).

Four in five (84%) adults out of 3,000 surveyed admit they do not read the full terms when they take out a financial product such as a savings account, a credit card, a loan, an insurance policy or a mortgage.

Some 452 people surveyed said they had taken out a payday loan in the past and these people estimated that the average annual cost they had incurred by not reading or understanding financial terms and conditions properly was £1,405.

The MAS found that a lack of understanding of what key financial terms mean is exacerbating the problem. Nearly half (46%) of people surveyed did not know the meaning of compound interest, which in savings accounts is when interest is earned on interest which has already been accrued.

Meanwhile, 44% of people did not understand the term annuity, which is an annual income that people buy with their pension savings. Nearly one third (30%) of people did not identify what APR (annual percentage rate, used to calculate borrowing costs) stands for.

Among people who said they had previously taken out a payday loan, 64% could not identify what APR stands for, while nearly a fifth (18%) believed that when someone takes out a loan, there is no obligation to pay it back.

On a regional basis, people living in the South East thought they had lost the least amount of money over the last year through not reading or misunderstanding financial terms, with an average estimate of £128 given, followed by people living in Wales, who gave a typical estimate of £163.

Consumers in Northern Ireland believed they had lost the biggest amount over the last year, at £1,014 typically, followed by people in London, who gave an average estimate of £878. In Scotland, the average amount people thought they had lost out on over the last year was just below the UK average, at £384.

Jane Symonds, a money expert at the MAS, an independent body set up by Government to offer financial tips, 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, 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."

The findings come as financial education is being placed on the national curriculum in secondary schools in England, meaning the country catches up with the rest of the UK.

The MAS has a jargon quiz on its website that people can use to test whether or not their knowledge of financial terms is up to scratch at www.moneyadviceservice.org.uk/en/tools/do-you-know-your-ear-from-your-elbow.

Here are some regional findings from the MAS research:

:: Scotland

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

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

Northern Ireland

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

Wales

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

East Anglia

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

East Midlands

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

London

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

North East

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

North West

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

South East

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

South West

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

West Midlands

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

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

Yorkshire and the Humber

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