The government reckons we need better education when it comes to our finances. Maybe, but most of us could benefit more from having decent financial options.
Let’s start with a maths quiz.
If Mrs Jones borrows an average of £1,000 on a credit card with a monthly interest rate of 2%, how much interest will she pay in a year? I’m guessing that even the mighty Carol Vorderman would struggle with that one.
Government review of consumer credit
Which is why the government has announced a review of consumer credit; in particular whether people really understand what they’re committing to.
Ministers are worried that some consumers are taking out loans and credit cards without fully understanding how much they’ll be charged and what they can afford to borrow.
Options under consideration include a ‘test’ for anyone taking out a loan to make sure they understand what it means for them personally. Lenders could also be forced to be much clearer about how much interest will be charged.
What about better financial options?
The question for me is whether this will make much of a difference? Payday loans are probably the best example here. If I desperately need to borrow £100 to buy food and clothes for the kids, how much attention will I pay to the interest rate?
When the loan company tells me I can have the £100 today and pay back £120 in a month, I might think that sounds like a good deal – it gets me out of a tight corner. Until next month that is, when I’m short again and now need to borrow £120 to repay the original loan.
Following this pattern for a year would mean repaying almost £900, equivalent to an annual interest rate of almost 800%.
Consumer education is always a good thing. However, making sure consumers understand interest rates and loan deals is only the first step. The more informed we are about our finances, the more likely we are to shop around for the best deal. But the market has to react too.
Where the system falls down is not primarily in consumers’ lack of understanding, but their inability to access affordable, mainstream credit when they are turned down by their bank.
Greater support for local, community-based lending, especially credit unions, is just as important as consumer education in helping people cope with their finances.
Oh, and by the way, Mrs Jones would pay £268.