They are the media-savvy generation, but teenagers are not so sharp when it comes to money. A study involving 8,500 teenagers from all social backgrounds found that most of them are financially illiterate.

More than three quarters could not identify the cheapest loan. They also grossly overestimate their future earnings and expect to be buying their own homes at the age of 25.

The findings, the first in a series of reports from NatWest that has started a five-year research project into teenagers and money, are particularly worrying as this generation of young people is likely to be saddled with greater debts than any before.

University tuition fees are currently capped at £3,000 annually, but this will be reviewed next year and the Government is under immense pressure to raise the ceiling.

In the research, the teenagers were presented with the terms of four different loans but 76 per cent failed to identify the cheapest.

The young people also predicted that they would be earning on average £31,000 by the age of 25, although the average salary for those aged 22 to 29 is just £17,815.

The teenagers expected to be in debt when they finished university or training, although half said that they assumed the debts would be less than £10,000. Average debts for graduates are £12,363.

Almost half (43 per cent) even thought that they would start paying off their student loans while they were still studying or as soon as they finished.

More than half (59 per cent) thought that they would own their own home at the age of 25 when the average age of a first-time buyer is 34.

Stephen Moir, head of community investment at the Royal Bank of Scot-land Group which owns NatWest, said while optimism was no bad thing in the young, it had to be balanced with a dose of reality.

“Ultimately, the more exposed young people are to financial issues, and the younger they become aware of them, the more likely they are to become responsible, forward-planning adults who manage their finances confidently and effectively,” he said.

Ministers are deeply concerned about the financial pressures facing teenagers and young people because of student loans and spiralling housing costs. They have just introduced new lessons in how to manage debts and incorporated them into the national curriculum.

Nikki Fairweather, aged 15, from St Helens, said that she had benefited from lessons on personal finance, but admitted that she still had a lot to learn about money.

The learning process inspired her to set up an account for the money that she earns from working at a local livery yard. However, she said that she was struggling to get her head round the debts she is likely to run up if, as planned, she trains as a vet.

She overestimated tuition fees at about £15,000 a year. In fact, the undergraduate fees are £3,070 a year, with postgraduate study at £9,500 a year.

She correctly identified the starting salary of a qualified vet at £30,000, but is still a little optimistic about the property market.

“I had hoped to be able to buy my own place when I was about 25 and qualified, but I’m not so sure about that now. I think 30 is more realistic,” she said.

It adds up to debt

Which is the cheapest loan?
(1) 20% APR, pay back monthly over 3 years
(2) 20% APR, pay back over 1 year
(3) 15% APR, pay back over 3 years
(4) 15% APR, pay back over 1 year

Answer:
(4).

On a £1,000 loan, the typical interest charges would be 1) £308; 2) £102; 3) £232; 4) £78

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