A University of Queensland study has found that the majority of consumers do not understand important features of simple credit contracts.
The research was conducted jointly by Paul O’Shea, lecturer in the TC Beirne School of Law, and the University’s Key Centre for Human Factors and Applied Cognitive Psychology.
“We tested almost 200 people with the usual documents for buying a used car on credit. Most could only get six out of nine important questions right,” Mr O’Shea said.
The participants were University of Queensland students aged from 16 to 37 with an average age of 20. Some were tested in situations of complete silence and others with distractions similar to those in a car yard.
“This age group was very representative of those who usually buy used cars on credit but was not representative of the education standard of the general population,” he said.
“They came from the top 27.2% of their Year 12 graduating classes so, logically, should have understood the contracts better.”
“What was particularly disturbing was that only 7.4% of participants could work out the total cost of the loan.”
Since 1996, all consumer credit contracts are legally required by the Consumer Credit Code to have a summary of important features disclosed in a financial table at the front of the document. This is meant to provide “truth in lending” and make the contracts easier to understand.
“Interestingly, there was no significant difference in understanding of contracts which had the required disclosure and those which did not,” Mr O’Shea said.
Mr O’Shea and the Centre would be doing further research into consumers’ understanding of credit contracts and other legal documents such as those used in investments.
“Clearly, the message for government and industry is that the current disclosure regime is not working as well as it should,” he said. “More work needs to be done on improving disclosure and on protecting consumers from unfair contracts by legislation such as the Unfair Contract Terms Regulations in the UK.”
Media: For more information contact Paul O’Shea, telephone 3365 6614, mobile 0421 970 615.
