A survey by UK finance broker Solution Loans has revealed that over half of millennials don’t understand what Annual Percentage Rate (APR) tells you about a financial product despite the fact that APR is key factor in dictating the cost of borrowing. The national average across all age groups for being able to correctly define APR is 46%, still less than half.
To test people’s financial knowledge, Solution Loans surveyed 1,000 adults asking them to identify the correct definition of term such as APR from a selection of seven. Those that responded were representative of all age groups from across the UK.
Compound interest, the phenomena of earning interest on interest and described by Albert Einstein as “the most powerful force in the universe” is, like APR, widely misunderstood. Only 38% of millennials could describe compound interest. Across all age groups the rate was 58%.
Perhaps most worrying given the level of publicity autoenrollment pensions have had in recent years, 43% of people couldn’t explain what one is. The UK government have spent millions of pounds in recent years promoting autoenrollment pensions and Pension Wise, the government service designed to inform people about pensions, pension legislation and their retirement options.
Perhaps unsurprisingly those in their 50s and 60s fared best. 61% of people in this age group understand APR, 76% know the ins and outs of compound interest, 69% can get their heads around auto-enrolment, 86% can explain the role of a guarantor, and 83% are well versed in the specifics of a balance transfer credit card.
Amanda Gillam from Solution Loans said: “In the UK, debt and credit is a way of life. It’s how we buy our homes, our cars and pay for many of our bigger purchases.
“Yet we found that when it comes to understanding how financial products work and specifically how interest and debt are calculated, as a nation our financial literacy is lagging. This is especially the case for the young. It’s worrying to think that especially young people are making potentially life altering decisions based on flawed or know knowledge of the financial products that they’re using. It’s key for future generations that financial literacy is taught, and a better understanding is achieved.”
For the full results of the study visit: https://www.solution-loans.co.uk/blog/data-shows-debt-prone-millennials-have-poor-grasp-of-financial-basics/