Low-credit youth with heavy debt, 1% interest rate hike cuts annual expenses by 540,000 won

Research Report by Kim Miru, Research Fellow at KDI Economic Outlook Office

Kim Miru, a research fellow at the KDI Economic Outlook Office, is presenting the report titled "Increase in Debt Repayment Burden among Youth Due to Interest Rate Hikes and Its Implications" at the Government Complex Sejong on the 26th.

An analysis revealed that young people with low credit scores and low incomes tend to reduce their consumption more significantly in response to an increase in the base interest rate. In particular, the number of young people taking out real estate-related loans during the low-interest period has increased, and it was found that low-credit young people with high debt reduce their annual consumption by more than 500,000 KRW when the base interest rate rises by 1 percentage point. There is advice that policies such as long-term installment loans should be supported to prevent the youth demographic from collapsing.

According to the report "Increased Debt Repayment Burden on Youth Due to Interest Rate Hikes and Its Implications" by Kim Miru, a research fellow at the KDI Economic Outlook Office, among the top 50% of indebted youth, those with low credit scores (credit score below 700) reduced their annual consumption by 539,000 KRW (2.2%) in response to a 1% increase in the base interest rate. Young people with card loans, second-tier financial institution credit loans, and multiple debts also reduced their consumption by approximately 190,000 to 290,000 KRW.

Among the top 50% indebted youth, low-income groups showed about three times the consumption reduction compared to high-income groups. Low-income youth reduced their annual consumption by 279,000 KRW (1.2%), whereas high-income youth reduced it by only 92,000 KRW (0.3%). It is interpreted that high-income groups were able to maintain their existing consumption levels through income or asset liquidation despite the shock of interest rate hikes. Middle-income groups also showed a consumption reduction 2.3 times greater than that of high-income groups, indicating that young people with high debt find it difficult to withstand the shock of interest rate increases.

The consumption reduction also showed a significant gap depending on the debt level. Young people without debt reduced their annual consumption by about 24,000 KRW, while those in the top 50% of debt holders reduced consumption by 264,000 KRW.

By age group, consumption among youth aged 30 and under shrank the most. Those in their 20s reduced consumption by 299,000 KRW, and those in their 30s by 204,000 KRW. Considering that the base interest rate increased by a total of 3 percentage points in 2021, it is estimated that people in their 20s and 30s reduced consumption by more than 600,000 KRW. In contrast, the consumption reduction for those aged 60 and above was only 36,000 KRW, which is 11 times less than that of people in their 20s. The report explains that this suggests young people, compared to middle-aged and older adults, have lower income and insufficient asset formation, making it difficult for them to properly respond to interest rate hikes.

The cause of the increase in youth loans was attributed to the surge in housing loans during the low-interest period. The proportion of housing loans in the total loans of young people exceeds 80%. Young people who lack the capacity to purchase homes took out loans to prepare for jeonse or monthly rent deposits, accounting for 30% of total loans. This is 24.4 percentage points higher than that of middle-aged and older adults.

Research fellow Kim Miru advised, "It is necessary to continue policy efforts so that young people can hold debt at a reasonable level," adding, "Ultimately, the housing sales and rental markets must be managed stably to prevent young people from taking on excessive debt." She also suggested, "Since young people are likely to see their income gradually increase from a life-cycle perspective, they should be able to take out loans with longer maturities."

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