Understanding finance and debt can be complicated, with plenty of confusing jargon and technical financial terms. When you don’t understand your finances, it’s easy to make financial decisions that aren’t right for you.
For instance, currently, as many as one in five Brits (20%) are making damaging financial decisions due to their lack of money knowledge, with 18% having ended up in further debt due to not understanding a money term.
The new one-of-its-kind study from Lowell determines which commonly-used financial terms are causing people to have money problems, as well as the detrimental effects misunderstanding them has had on their personal lives.
According to the National Financial Educator’s Council, underfunding and not teaching the most relevant life skills has resulted in a lack of personal finance training. Plus, 32% of Brits are too uncomfortable to discuss money problems.
Due to a lack of resources and the negative stigma surrounding financial issues, Brits are accumulating debt and are having severe personal, relationship and health issues, prompting credit management company Lowell to conduct a nationwide study.
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In fact, their data shows that 46% of Brits have had money issues such as bigger payments, further debt and longer contracts as a result of misunderstanding a money term or not having the correct financial knowledge.
The research also determines the key commonly-used financial terms people should know, as well as the detrimental effects misunderstanding them has had on lives across the UK.
What are the financial terms most likely to be misunderstood?
Balloon payment is officially the most misunderstood financial term, with 79% of Brits confessing they don’t know the meaning. Although a personal contract purchase (PCP) is one of the most popular ways to buy a car, Brits aren’t aware that they should prepare for an end-of-term lump-sum balloon payment before they take the loan out to avoid a big surprise fee.
Even though APR (Annual Percentage Rate) is a key part of borrowing on credit cards or loans, almost half (47%) don’t know that a high APR will increase repayments.
Furthermore, although equity is a term used through the house buying process, 46% don’t understand how much of their home they own.
Plus, one in four (24%) claim they do not know what interest is, even though it can have positive implications when saving.
A general lack of financial knowledge and misunderstanding money terms has resulted in 8% of people in the UK accumulating up to £500 worth of debt, and 9% have accrued up to £1,000. In some circumstances, one in 50 (2%) even have over £10,000 worth of debt.
As well as the hefty financial implications, Brits are also facing personal difficulties as a result of money problems brought on by a lack of financial understanding.
What personal difficulties are being faced because of money problems brought on by financial misunderstandings?
Almost half (41%) have lost sleep due to stress, 21% have split up with their partners and 14% have even gone through a divorce, which will add even more financial strain as the application alone is £593, and the average total cost is around £14,561. Further health issues include weight loss (14%), alcohol or substance abuse (11%) and mental health problems (21%) too.
John Pears, UK Managing Director of Lowell UK, said, “At Lowell, we know the importance of understanding your finances. The cost-of-living crisis is having a huge impact on many households, and in such an intense financial period, we want to ensure that people are as well-equipped as possible to handle their finances, so that they don’t have a heavy influence on people’s personal lives.”
“Our report shows a high percentage of money problems were due to a lack of financial understanding. We want to help break down the stigma surrounding money and people asking for help because it’s very difficult to learn about money matters when you’re discouraged from talking about them.”