Lending industry must ‘monitor’ consumer failure to compare finance products

Millions of people are failing to compare lending products from at least two providers and risk not getting the best deal available to them, research by Freedom Finance has indicated.

The fintech firm analysed FCA data and suggested there is a “widespread lack” of searching for loan products, as well as a low level understanding of terms such as APR, that is hindering the ability to compare products accurately.

Four in 10 consumers said 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 62%, while seven in 10 did not compare payday loans from different providers.

Freedom Finance’s findings also indicated that 35% of the 44.4 million who took out loans last year said they had a “poor understanding” of how APR works – which is the figure lenders must include when advertising products to ensure borrowers can compare the cost of credit between different loan products and providers.

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.

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 three to five years, this extra cost of debt could amount to hundreds of pounds.

Freedom Finance chief marketing officer, David Hendry, described the findings as 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,” Hendry 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.”

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