New research reveals younger borrowers are more financially savvy than their older counterparts, but three quarters of all consumers want to know the real cost of their financial products
Younger borrowers are more financially savvy than the baby boom generation, despite the lack of access to credit as a result of the recession. Research* released today, by the Consumer Finance Association, found that 16-24 year olds have a greater understanding of APRs and recognise the difference between monthly charges and confusing annual percentages.
When asked how much the average monthly interest is on a £100 loan from a payday lender, a quarter of 16-24 year olds correctly answered between 25 and 50 per cent, however just 15 per cent of 45-55 year olds got it right, and 60 per cent of those over 45 years old incorrectly gave the answer as between 2000 and 5000 per cent.
Russell Hamblin-Boone, Chief Executive of the Consumer Finance Association said: “No-one ever pays back thousands of per cent in interest, on a short-term loan. Quite simply, the average charge is £25 per £100 borrowed. APRs associated with payday loans are often the focus of negative comment and discussion, however, a high APR does not mean it is the most expensive form of borrowing, the length of loan affects the APR figure; shorter loans have higher APRs since APR is based on a 12 month period.”
Survey respondents were asked how much they would pay back if they borrowed £100 for a month through a short-term loan with an APR of 1,355.2 per cent, perhaps unsurprisingly, nearly a third of people (28.6 per cent) said it would cost £1,355.20, more than a fifth (21.8 per cent) said it would cost £1,455.20 and just a quarter (24.4 per cent) correctly said it would cost £125.
Russell Hamblin-Boone said: “Our research found that 72 per cent of people surveyed would prefer to be able to compare financial products in pounds and pence. Borrowers should not confuse APR with the actual interest rate, the most important thing to know is the total cost of the credit.”
For this reason, the CFA, which represents 60 per cent of the UK short-term lending industry commits members to transparency so that there can be no doubt that the customer understands the cost of the loan in pounds and pence as well as the regulatory APR requirement.
Worryingly the report also revealed a lack of knowledge across financial products. When presented with a series of common loan types and associated APRs, just 15 per cent correctly identified that a £200,000 mortgage over 25 years with an APR of 7 per cent would cost them twice as much eventually, whereas more than 4 in 10 thought a £200 payday loan would be double that in a month’s time if the APR was 1,355.2 per cent (actual total cost £250).
Russell Hamblin-Boone added: “It is clear from this survey that consumers want and need clear, jargon-free information to help them make better financial decisions.
“This research conclusively shows that people are confused by APRs on all financial products, whether it is for a major purchase like a house or a car, an unauthorised overdraft, a loan from a friend or a short-term loan.
“The payday loans industry is unfairly criticised for its APRs. We need to level the playing field and ensure all providers of all types of credit quote APRs and, more importantly, require all providers to tell customers the full cost of their loan in pounds and pence. Ensuring consumers have access to the right numbers to be able to compare products that best suit their financial requirements.”
For more information, or for interviews with the CFA, please contact the CFA’s Communications Team:
- Richard Griffiths, Head of Media: firstname.lastname@example.org or 07875 653 959
- Rhiannon Thompson, Head of Communications: email@example.com or 07834 266 639
Public Accounts Committee, 20 May 2013(http://www.publications.parliament.uk/pa/cm201314/cmselect/cmpubacc/165/16504.htm) :’
“Many consumers do not understand the APR measure, which lenders are required to display, leaving them unable to compare products properly. Some banking products such as unauthorised overdrafts are exempt from displaying APR though these can total millions of per cent. As a result, consumers may be misled to believe that alternatives such as short-term loans are more expensive, given the erroneous thousands of per cent APR which such lenders are forced to display. A new measure to replace the outdated and misleading APR rules is needed and, like others, including the NAO and the BIS Select Committee, we favour a clear statement of the Total Amount Repayable, in cash—and would support this being put on a statutory basis.”
Department for Business Innovation and Skills
Business, Innovation and Skills Committee – Debt Management Report (Fourteenth Report of Session 2010–12, page 26)
“The APR must be included in credit agreements and pre-contract information. A typical APR must be included in most credit advertisements. This is intended to help consumers to compare the cost of different credit deals. Both sides of the high cost credit argument agree that using the APR as the price comparator is not ideal for payday loans. It is believed that although companies have to advertise the APR of a payday loan the customer is far more interested in the actual cost.”
National Audit Office
Regulating consumer credit (Technical paper – December 2012)
“For some short term loans the APR is not the most suitable way to compare costs and the total cost of the loan is more suitable.”
About the research
* In July 2013, Censuswide surveyed 2,038 UK adults. They were randomly sampled and are fully representative of the UK population. The survey, which was conducted online and via the telephone, was conducted in accordance with Market Research Society guidelines.