MORE than three-quarters of adults struggle to understand financial jargon, leading millions to make poor-value product choices or incur avoidable penalty fees as a result.

According to credit check provider Noddle, 40 million UK adults are confused by money-related abbreviations and terminology.

Managing director Jacqueline Dewey said: “As innocuous as this may seem, it’s having repercussions for consumers’ finances. Not only are people missing out on favourable rates because of lack of understanding, they are also being stung with unnecessary charges.”

Noddle says six million people have suffered late fees because they failed to grasp conditions attached to financial products, and a similar number believe misunderstanding the terms of an agreement has damaged their credit rating.

Meanwhile, more than five million say they have lost out on good deals because they were baffled by the way the offer was explained.

Ms Dewey said: “Consumers may be paying off their credit card bills late because they are confused about the terms and conditions on their monthly statement. This means they are being hit with interest and run the very real risk of hurting their credit score.

“It is, therefore, important not to shy away from financial topics – despite some terms being difficult to understand. Ultimately, taking a proactive approach in improving your financial knowledge will help you take control of your finances.”

The most commonly misunderstood terms in Noddle’s survey were effective annual rate (EAR) and loan to value (LTV), with close to half of those taking part unable to say what they meant.

Compound interest, individual voluntary arrangement and annuity all stumped a third, while one in five could not explain annual percentage rate (APR) or equity release.

One in six did not know the definition of base rate and almost one in 10 confessed to being baffled by inflation, even though both have a major impact on household finances.

APR is the amount it costs to borrow money over 12 months, including interest and any other charges, such as an arrangement fee. Someone borrowing £1,000 at an APR of 10 per cent would pay £100 in interest and charges over a year.

EAR is the rate of interest on a debt over the course of a year, excluding fees or penalty charges. For savings, the interest earned is expressed as the annual equivalent rate, or AER.

Compound Interest is a return paid or amount charged on both the original sum invested or borrowed and the interest already accumulated. At a compound rate of 10%, £100 would become £110 after a year and £121 a year later. Compound interest helps savings grow faster, but also increases debts quickly.

LTV represents the amount borrowed as a proportion of the value of what is being purchased. For example, a house buyer with a deposit worth 20% of a property’s valuation would need an 80% LTV mortgage to make up the rest of that price.

An individual voluntary arrangement, or IVA, is a way to avoid bankruptcy by agreeing with creditors to clear what is owed at an affordable rate. It is only available in England, Wales and Northern Ireland. The nearest Scottish equivalent is a protected trust deed. To qualify, applicants must fulfil certain criteria, such as proving they have a regular income and can meet the repayments.

An annuity is a contract with an insurance company that pays a regular retirement income either for life or a set period. It is typically bought with the proceeds of a pension pot.

Equity release is a way for older people to acquire cash – at a relatively high cost – against the value of their property. It can take the form of a lifetime mortgage, with interest rolled into the debt or repaid monthly and the balance cleared when the property is sold. Or it can be a home reversion scheme, where the lender buys a proportion of the property and gives the owner lifetime residence.

The base rate is the official borrowing rate the Bank of England charges other banks and lenders, and it influences what they, in turn, charge their borrowers and pay savers.

Inflation is the rise in the cost of living as the prices of basic goods and services increase.

For more definitions of potentially confusing terms, visit the Ageuk.org.uk jargon checker.

For impartial information on debt and borrowing, budgeting and saving, pensions, insurance and benefits, see Moneyadviceservice.org.uk, Citizensadvice.org.uk or Which.co.uk.