Are you financially literate?

Being financially literate essentially means knowing the ins-and-outs of basic financial situations. Having better financial skills will help you budget more effectively and improve the way you manage your personal finances.

For example, it helps to know what a personal loan is, how a loan works and the key questions you need to ask yourself before getting a loan to make sure you’re armed with the information you need to make a sound choice. Making any decision about your finances is important, so it’s a good idea to take the time to improve your general financial knowledge.

Brits are becoming more financially savvy

Our own research shows that Brits are taking greater control over their finances, in fact:

• A third of Brits used lockdown to improve their financial literacy
• A quarter said that their understanding of personal finance products and services has improved

That said, with a third of us not taking time to fully understand the terms of a financial product before signing on the dotted line, it could be time to refresh your financial know-how.

How to be financially literate

There’s no magic formula or specific courses you need to take to become financially literate. It’s all about educating yourself to become better at understanding and managing money, whether you want to learn how to budget better, the best way to save, ways to identify financial fraud, the ins-and-outs of borrowing money or how to invest.

What type of learner are you? Do you prefer to watch videos, read books or listen to podcasts? There’s a wealth of information on money management out there, so test and try a few different ways to learn. Finance can be more interesting than you first think if you find a medium that suits you.

Taking the first steps to get your finances in order

Many people on their journey to becoming financially literate also want to discover the best ways to manage their finances. You can do this by:

• Reassessing your budget. Analyse what money’s coming in and what money goes out each month, leaving you with a clear idea of how much disposable income you have leftover. Once you know this, it’s much easier to plan your spending (and saving). You’ll be able to look a little closer at any unnecessary expenses too - such as subscription costs for a service you no longer use, or one-too-many takeaways – and identify easy ways to start cutting back on your costs
• Start saving sooner rather than later, to ensure you have enough money saved for a rainy day. It’s recommended you keep around three months’ worth of your salary, or enough to cover three months of living expenses in an easy-access savings account
• Understanding your credit score. Most lenders will take your credit history into consideration when deciding whether to lend money to you, so you should make sure you understand the information on your credit report and the impact it could have on your ability to borrow
• Make your debt more manageable. If you have several high-interest credit cards, for example, a debt consolidation loan could make it easier to manage your finances. By paying off all your other debt with one loan, you’ll only have one repayment to manage each month

The importance of understanding your finances

Everyone ought to feel comfortable managing their money, and educated enough to make sound financial decisions when it comes to budgeting, saving, borrowing and investing. This stands you in good stead for financial milestones such as buying your first house or car, managing debt responsibly or planning for your future. You’ll feel far more confident making key financial decisions if you are financially literate.

A lack of basic understanding of financial products and services could lead to you making ill-informed decisions. Whether you simply haven’t got round to reading up on how financial products work, or you mistakenly believe your knowledge is sufficient, borrowing money without the knowledge you need can lead you to taking out a product that’s not entirely suitable.

Five common personal finance misconceptions

1. I’ll own my vehicle if I take out car finance

More than half of Brits wrongly assume that a vehicle on a contract hire plan belongs to the person taking out the agreement, whereas in reality you won’t be the legal owner of your vehicle until you reach the end of your term – and, even then, only if you choose to pay your final fee or balloon fee. Debunking a few common myths like this and understanding the differences between car finance and personal loans will help you make a more educated and effective choice.

2. Financial problems only impact people with low incomes

Money worries don’t always stem from a lack of finances – often, issues arise when an individual isn’t sure how to manage their money effectively. That means financial problems aren’t limited to low earners. If you’re struggling to make good decisions with your money, you could run into issues, no matter how much you earn. It’s therefore important for everyone to read up on basic budgeting tips and financial literature so you are in the best possible position to look after your money.

3. The APR on a personal loan is always higher when borrowing large sums of money

Not necessarily. The APR you’re offered is personal to you. Your lender will decide what APR to offer you based on your personal circumstances and credit history, plus how much you want to borrow and over how long.

You can use our online loan calculator to get an idea of how much it could cost to borrow money from us.

4. Representative APR on a personal loan will be the same for anyone taking out an identical amount with the same provider

The APR you’re offered when you apply for a personal loan is entirely personal to you and is based on your own circumstances and credit history.

The Representative APR you see advertised by personal loan providers is the APR that applies to at least 51% of personal loans paid out. That means 49% of people may pay a different APR. Therefore the APR may not always be identical for everyone applying, even if they’re applying for the same amount, over the same term, from the same provider.

5. Multiple credit applications won’t reduce my chances of acceptance

This isn’t true, either. Every time you apply for credit, the provider will carry out a hard credit search which will leave a mark on your credit report. Even though the outcome of your applications won’t be visible on your report, multiple hard credit checks in quick succession might still be a red flag to a lender and could reduce your chances of being accepted for credit.

If, for whatever reason, your application is declined, it’s far better to try and investigate why rather than panic-applying to lots of other different lenders. You can request a copy of your credit report to make sure the information is correct, and then take steps to try and improve your credit score before reapplying for a loan.

It could also be a good idea to choose a lender that offers a soft search option. This way, you’ll be able to see what APR you’ll be offered and the likelihood of acceptance before committing to a full application.

The main things you need to know about personal finance

To help you on your way to becoming financially literate, we’ve detailed the main things you need to read up on:

• Understanding key terms and phrases used in the personal finance industry, from ‘fixed rate’ to ‘total amount repayable’
• How to manage and budget your finances effectively
• The importance of having a bank account, and understanding the different types of bank account available
• How different lines of credit work. For example, the difference between personal loans and credit cards
• How to identify and prevent financial scams
• The difference between APRs and interest rates as well as how they are calculated
• Understanding the difference between secured and unsecured loans and how they work
• The importance of good credit history and how to maintain it
• How inflation impacts your finances

If you’re looking to learn even more about personal finance, bookmark our blog or follow us on Facebook or Instagram for our top tips.