The shocking impact of low financial literacy

“Which of these loan rates is better for your finances: 29.9% APR or 4.9% APR?”.   

The answer may seem obvious, but shockingly, low financial literacy can lead some to mistakenly conclude that a 29.9% APR loan rate is better, simply because it’s a higher number.  In today’s financial landscape, borrowing money has become a quick solution for many employees facing financial challenges.  

With an increasing proliferation of payday loans, buy-now-pay-later (BNPL) offerings and credit cards, access to credit is widespread. BNPL loans, in particular, are commonly offered at online checkout, and can now even be used to buy takeaways.  Recent research by Fair4All Finance1 shows that nearly three million people in the UK fell into financial difficulties over the previous year, bringing the total to 20.3 million adults, with some turning to loans to bridge the gap between their wages and the cost-of-living. 

Financial stress directly impacts employees’ work performance, health and overall quality of life.  Employers are looking for cost-effective ways to support their employees, with many recognising that loans are not a sustainable long-term solution.  

Lenders are legally required to disclose repayment terms upfront, but that doesn’t mean that making the right decision is straightforward. Many people enter into loan agreements without understanding the full financial implications. A recent survey revealed that 39% of UK adults with credit cards were unaware of their Annual Percentage Rate (APR) and only 19% could recall it correctly2. The significant gap in financial literacy puts employees at risk of making poor financial decisions, especially when it comes to borrowing and saving for the future. 

Francis Goss, Director at MoneyFit Financial Wellbeing, says: “A lack of financial literacy can lead individuals to take out extortionate loans without understanding the true costs, ultimately placing them in financial jeopardy. It’s a reminder of the urgent need for financial education to boost employee financial literacy. High-interest loans and credit cards are often approved without adequate financial education support. While interest rates may be transparent, a lack of financial literacy means borrowers may not understand the true impact of compound interest, early exit fees and credit score. For employees struggling to make ends meet, this lack of understanding can lead to unintentional decisions that worsen their financial wellbeing and trap them in a cycle of debt.” 

Financial literacy refers to the ability to make informed, confident decisions about finances underpinned by financial and numerical literacy.  

Low financial literacy has a detrimental impact on financial wellbeing.  Employees who take out loans for example may not understand how interest, fees, and the impact on their credit score can lead to long term financial stress. Similarly, employees who do not understand the long-term value of saving, tax efficiency, compound interest and investment growth may opt out of the company pension scheme, leaving them with no additional savings for retirement.   

Employees dealing with financial stress are more likely to experience mental health challenges, including anxiety and depression. Financial stress also leads to tangible workplace issues, such as reduced productivity, absenteeism and higher employee turnover. Addressing financial wellbeing is not just a social responsibility – it’s a strategic necessity for employers aiming to create a healthier, more productive workforce. 

Employers have a crucial role to play in integrating financial education into their employee benefits offering. Here are some of the practical ways employers can help employees: 

1. Embed financial education into the employee benefits offering. By embedding financial education into employee benefits, firms can offer meaningful, practical support. Initiatives such as financial education videos, money-management webinars and cashback schemes can help employees manage their money more effectively. For example, offering cashback on everyday spend can help employees build a buffer while also encouraging a culture of saving, alleviating some financial stress. 

1. Action plans for success. Employers can provide access to bespoke action plans as part of their toolkit of financial wellbeing benefits, providing personalised education to help improve financial confidence, control and capacity. For example, the MoneyFit quiz allows employees to complete action plans at their own pace, building financial literacy over time while gaining the support they need to make informed financial choices in the short-term. 

1. Signpost employees to free help and support available. By directing employees to reliable financial resources and support services, firms can help alleviate the stress and anxiety that often stems from money worries. Signposting to trusted sources such as debt management services enables employees to better manage their finances and gain a clearer understanding of their options. This support reduces emotional strain and fosters a greater sense of control, allowing employees to feel more secure and focused in both their personal and professional lives.

Providing support for financial wellbeing not only protects employees from stress, but also enhances overall wellbeing, engagement and productivity. Employers who prioritise financial literacy create a more resilient workforce. Financially literate employees are better equipped to manage stress and avoid the pitfalls of uninformed borrowing, contributing to a more engaged and healthier workplace. 

Goss concludes: “Low financial literacy is a growing issue in the UK and is not solved by loan provision which is often a sticking plaster solution.  With the right support, employees can learn to navigate financial decisions and face their financial future with confidence. By providing education, resources and tools, employers can help mitigate the effects of low financial literacy and support employees in building a more secure financial future.” 

To find out more about MoneyFit, you can visit Zest’s Marketplace.

To take the UK Financial Literacy test and see how you compare, visit https://money.supersurvey.com/Q4O9SUU6P  

Sources:  

1. Customer segmentation research with Trajectory and CACI, Fairforall Finance 2024
2. Research, conducted by OnePoll on behalf of NerdWallet UK 2024