Almost a third of people don’t understand the impact of interest rates on their money

Ahead of the Bank of England’s interest rate decision later today, brand new research from consultancy Newton highlights a shocking lack of understanding of the impact of interest rates on the cost of borrowing, particularly amongst vulnerable groups.

 
According to Newton’s upcoming report –  The Vulneability Void –  a third of people don’t understand the impact, and this rises to 44% of Gen Z.
 

• 32% don’t correctly understand the impact of rising interest rates on the cost of borrowing money; 12% think rising interest rates make it cheaper to borrow money, while 20% think it has no impact.
• There’s a huge generational divide – 44% of Gen Z think higher interest rates don’t impact the cost of borrowing money, compared to 5% of Baby Boomers.
• Nearly half (46%) of those defined as financially vulnerable by the FCA don’t know that higher interest rates make borrowing more expensive.

 
Junaid Mujaver, Partner of Financial Services at Newton Europe, comments: “The Bank of England is set to increase interest rates yet again, to try to mitigate the inflationary environment.

“However, a significant proportion of the population doesn’t know or understand what the interest rate and its fluctuations mean for their finances. The data shows that this is noticeably high amongst those identified as ‘financially vulnerable’, with almost half (46%) incorrectly believing that higher interest rates either don’t impact the cost of borrowing money, or make the cost of borrowing money lower. Financial vulnerability covers anyone who struggles to understand conversations about money and finances, who couldn’t make financial decisions without help, who is not confident with their literacy skills, or who is barely able to make ends meet.

“Financial services providers need to step up and take note, because if vulnerable customers are struggling to understand the cost of borrowing, they are definitely at risk of being mis-sold credit or loans – which can include mortgages, banks, car finance and student finance. With Consumer Duty fast approaching, these providers need to be proactive in ensuring their digital journeys offer full and clear explanations of what a borrowing commitment entails and are adapted to be accessible and understandable for the financially vulnerable so that no one is being under-serviced or overlooked by their provider.”
 

Key Stats from ‘The Vulnerability Void’ campaign from Newton

 
Close to a third of those surveyed (32%) are not aware that rising interest rates equate to higher borrowing costs – with 20% believing interests rates have no impact on the cost of borrowing, and 12% thinking that as interest rates rise, borrowing gets cheaper. This is especially true of the younger generation, with 44% of Gen Z believing that higher interest rates have no impact on the cost of borrowing. Conversely, this number is only 5% for Baby Boomers, likely a result of being exposed to periods of higher interest within their lifetime.
 

 
This trend is borne out in financially vulnerable people too – those who identified as financially vulnerable were more likely to get the answer wrong, especially those who struggle to understand money, finances, and reading/ writing. This trend doesn’t play out so much across other vulnerable traits, including physical and neuropsychological conditions.
 

Research Methodology
 
Newton conducted the survey, via Censuswide, with 3,007 General consumers (aged 18+) (with at least 50 respondents who live with each of the following conditions: ADHD, learning difficulties, autism, low-sight, hard of hearing, Alzheimer’s and Parkinson’s) between 21.02.2023 – 27.02.2023. Censuswide abides by and employs members of the Market Research Society – which is based on the ESOMAR principles – and is a member of The British Polling Council.