Over three-quarters of consumers are baffled by financial jargon

Over three-quarters, (77%) of consumers say they are confused by financial jargon and this is having consequences for their finances, according to research.

Six million consumers have incurred late fees because they’ve misunderstood information on financial products. One in 10 (10%) say they have lost out on favourable rates at the bank because they were confused by financial terminology and 12 percent admit their credit score has been impacted because they didn’t understand the terms and conditions on a financial agreement.

Free-for-life credit report provider Noddle.co.uk has created a league table of all the words and abbreviations confusing Brits the most.

Topping the table is effective annual rate (EAR) – with almost half (48%) saying they have no idea what it means. Other terms causing confusion include loan-to-value or LTV (47%), compound interest (35%), individual voluntary agreement or IVA (34%) and annuity (31%).

And despite the Bank of England recently raising interest rates, 16 percent say they are confused by the term ‘base rate’. Almost one in 10 (8%) say they are baffled by the word inflation, even though it has a big impact on the cost of everyday items.

With so many Brits saying they are confused by financial jargon, it’s unsurprising that one in five (20%) don’t believe they have a good grasp of financial terms and concepts. Nearly half (47%) say they mentally switch off when they hear financial words and only a third (34%) say they enjoy learning about personal finance.

This lack of understanding may be down to poor financial literacy. A separate Noddle study found that almost of half (46%) of UK adults don’t believe their education prepared them to make financial decisions in adulthood.

Jacqueline Dewey, Managing Director of Noddle.co.uk, said: “It’s clear that many Brits are baffled by financial jargon. And as innocuous as this may seem, it’s having repercussions for consumers’ finances.”

“Not only are people missing out on favourable rates because of this lack of financial understanding, they are also being stung with unnecessary charges too. Worryingly, a significant minority have even seen their credit score negatively affected.

“For example, consumers may be paying off their credit card bills late because they are confused about the terms and conditions on their monthly statement. This means they are being hit with interest and run the very real risk of hurting their credit score.

“It’s therefore important not to shy away from financial topics – despite some terms being difficult to understand. Ultimately, taking a proactive approach in improving your financial knowledge, will help you take control of your finances.”

Overview of financial jargon:

1. Effective Annual Rate (EAR) – is the actual percentage interest that a bank account or a loan will earn or pay on an annual basis

2. Loan-to-Value (LTV) – is a ratio that describes the size of a loan you take out compared to the value of what you’ve purchased, such as a house

3. Compound Interest – it’s when interest is paid on both the original amount of money and the interest it has already earned. Think of it as interest that slowly gets bigger over time; like building a house. So, 10% interest on £100 would be £110 after a year, and £121 the year after. The interest is worth £10 in first year but compound interest means it’s £11 in year two. This might sound minor, but after many years it really starts to add up

4. Individual Voluntary Arrangement (IVA) – is an agreement with your creditors (e.g. the people you owe money to) to pay off your debts at an affordable rate. Not everyone can get an IVA – there are certain criteria that you have to meet, such as a regular income or money left over each month to pay your creditors

5. Annuity – is a contract between you and an insurance company which pays a regular retirement income either for life or a set period. You typically buy it with all or part of your pension pot

6. Annual Percentage Rate (APR) – this refers to the amount it will cost you to borrow money over 12 months, including interest and other additional fees, such an arrangement fee

7. Equity Release – is a way to unlock some of the value of your property, and turn it into a lump sum of money

8. Base Rate – is the Bank of England’s official borrowing rate e.g. what it charges other banks and lenders when they borrow money. It ultimately influences what borrowers pay and savers earn