Personal finance ‘paralysis’ costs UK consumers £18.7 billion per year, according to new research from Freedom Finance.
Freedom Finance, the fintech lending platform, worked with a senior economist from Strathclyde Business School to calculate the cost of personal finance indecision. The study found a failure to switch or consolidate credit card debts costs UK consumers £10.5 billion a year. A failure to switch or consolidate personal loans costs UK consumers £5.7 billion per year. UK mortgage holders who aren’t on fixed rates are losing £2.5 billion a year by not switching.
The report says today’s consumers have access to a larger range of financial products and providers than ever before, finding and comparing lending products at the click of a button. However, nearly half (45%) of UK adults say the process of making important personal finance decisions makes them feel overwhelmed and anxious.
The impact being that over a third (38%) of adults are regularly delaying or not making important financial decisions, costing them over a thousand pounds per year.
Despite being the most internet savvy, young people are twice as likely as baby boomers to suffer from personal finance paralysis. 46% of Generation Z (18-24 year olds) and 50% of Millennials (25 – 34 year olds) regularly delay or put off making important personal financial decisions because the process makes them feel overwhelmed and anxious, compared with 22% of Baby Boomers (over 55s).
Over a quarter (27%) of UK consumers said FOMO, a fear of missing out on ‘a better deal out there’ has stopped them from making important personal finance decisions.
According to the study, it takes an average of 21 minutes for a consumer comparing personal finance options to feel anxious and overwhelmed by the process and ‘give up’.
According to Freedom Finance’s study, a quarter (27%) of consumers avoid making personal finance decisions because they worry that they won’t qualify for the lending product and that their credit score will be impacted. A quarter (25%) of consumers said they worried about agreeing to terms and conditions that they don’t understand, and 44% said they were confused by APRs.
Freedom Finance asked consumers what financial service providers (FSPs) can do to address this problem:
- 71%said they want more clarity from FSPs about which financial products they qualify for and which are ‘right for them’
- 38%said FSPs should make it clearer when a search and application will impact credit scores
- 41%of consumers said FSPs should make terms and conditions simpler
- 31% said financial service providers should explain in detail what an APR is and how it works
- 30% said FSPs should only direct products towards them that they are eligible for
Brian Brodie, CEO of Freedom Finance said “The past decade has seen a massive shift in the way consumers compare and buy financial products. Traditional broker services have digitalised on mass, and most consumers seeking credit visit online platforms and comparison sites. But what’s clear from our research is that consumers seeking financial lending products feel blinded by choice. Often the choice isn’t real, as it includes options consumers aren’t actually eligible for, leading to frustration and confusion. As a result, consumers are delaying or completely avoiding making financial decisions.”
“Overwhelmingly, consumers are telling us they want clarity, and not just loads of choice. Our industry must tackle personal finance paralysis by providing tailored options for individual consumers providing short, jargon-free terms and conditions. Technology works best when it is helping to facilitate human interaction and trust. It’s our responsibility to ensure borrowers feel empowered to make well-informed decisions. Artificial intelligence and machine learning is transforming lending, but the importance of human touch should not be forgotten.”
David Hillier, Professor of Finance and Executive Dean of Strathclyde Business School, who partnered with Freedom Finance to produce the research “The scale of personal finance ‘paralysis’ and its impact on households and the economy is cause for concern. Consumers deferring or not making important personal finance decisions like consolidating loans or switching mortgage providers, costs the UK around £20.2 billion a year. As interest rates rise, we stand to lose even more.”
“Consumers aren’t entirely rational, and financial decisions are influenced by the information available to them, cognitive limitations, and the finite amount of time available to make a decision. Many consumers operate under the assumption that making no decision is preferable to making the ‘wrong’ decision. But by failing to pull the trigger, consumers lose thousands of pounds.”
“Economic and political uncertainty impacts consumer behaviour. With Brexit on the horizon, financial service providers should focus on empowering consumers with the knowledge and confidence to make important personal finance decisions that benefit them.”