Millions of people are failing to compare lending products from at least two providers and risk not getting the best deal available to them, according to analysis of FCA data from Freedom Finance, the fintech behind one of the UK’s digital lending marketplaces.
The data shows a widespread lack of shopping around across most loan products and a low-level understanding of terms like APR that hinders the ability to compare products accurately.
Four in 10 consumers said that they did not compare personal loan products, with a slight increase among those getting a credit card. Of those accessing car loans this rises to nearly two-thirds (62%) and even more worryingly, seven in 10 did not compare payday loans from different providers.
Just over a third (35%) of the 44.4 million who took out loans last year said they had a ‘poor understanding’ of how APR works – this is the figure lenders must include when advertising products to ensure borrowers can compare the cost of credit between different loan products and providers.
Moreover, around a third (31%) of credit card borrowers and a quarter (23%) of people taking out personal loans admitted that they did not know the APR when they took debt out. At the same time, almost half, 40% did not try to find a cheaper loan or credit card from a different provider.
Younger borrowers in particular struggle with understanding the cost of loans, as 42% of Millenials (born 1981 -2000) and 73% of Gen Z (born 2001 onward) were found to have a poor understanding of APR.
APRs on loans for £1000 currently range between 9.8% and 13.5%, meaning that someone opting for the more expensive loan could pay over a third more in interest. With the most common loan lengths around 3-5 years, the extra cost of expensive debt could amount to £100s.
Loan marketplace platforms, like Freedom Finance, help customers find the cheapest possible loans available to them, and it’s extensive online guides will help borrowers understand how to make borrowing decisions.
In the past 12 months, Freedom Finance has helped millions navigate finance and get help to access loans with some of the UK’s largest lenders through its award-winning financial marketplace.
David Hendry, Chief Marketing Officer at Freedom Finance, said the findings were a red flag for a lending industry that should be on high-alert to the risk of poor consumer outcomes caused by failing to shop around or understanding the differences between product terms.
“Credit plays a vital role for many people and when used appropriately can improve financial wellbeing by minimising expensive, drawn-out debt,” he said. “However, paying more in interest and fees than is necessary contributes to the risk of ‘over-indebtedness’ and can lead people to situations where they struggle to pay off their credit commitments.
“The industry actively needs to be monitoring these issues and continue to drive up consumer awareness of the benefits of using digital tools to shop around and make sense of what they are eligible for.
“Otherwise, the danger is a two-tier system emerges where those able to navigate the system obtain the best deals, while others are left overwhelmed by choice and exposed to the risk of poor outcomes.”