UBS Survey: Young adults earning US$100,000 annually are most fearful about debt repayment
A survey of 2,100 American adults aged 21 and over has revealed that fear of defaulting on loans is highest among young adults aged 21-34 with annual salaries of US$100,000 or over. As the level of total debt in the US has risen, 40% of middle- and high-income earners are worried that they will become unable to repay loans within a year.
UBS warned investors to shun investment in alternative finance, and auto loan and credit card companies, in order to avoid risk.
30% unconfident of debt repayment despite earning US$100,000 annually
UBS carried out the survey over nine occasions between November 2014 and March 2017. The survey reveals that indebtedness is growing fast among middle-income and high income earners (over US$100,000).
Overall, 17% of people surveyed are sure they will default on their loans within the next year, up from 12% before last year’s presidential election. Whilst less than 10% of those on low incomes (below US$40,000) are sure of defaulting, the proportion rises to 16% for middle income earners (US$40,000-US$99,999) and 26% for high income earners (over $100,000).
By age, over 50% of people aged 21-34 and 31% of people aged 35-44 living in a major urban area are concerned about falling into arrears, with this fear dropping sharply to no higher than 7% for older age-groups.
Multiple property owners despite the debt burden
Why is it that high-income young adults leading a comfortable life in big cities are now more burdened by debt than ever before?
Home ownership is high among the age-group with the highest concern about debt repayment at 77%, with 41% of them having taken on a mortgage, 31% a home loan and 16% a credit card debt to fund the purchase. Of those with a mortgage, 38% have a variable interest mortgage and 8% a lump sum repayment mortgage.
It is perhaps surprising to discover that, despite feeling uncertain about their ability to repay their loans, 61% of these borrowers own more than one property. Fifty-five percent recognise that their expenditure exceeds their income, while 57% are tormented by fears of what would happen if they were to lose their job or their income were to drop.
In its release about the survey, UBS warned investors to avoid investment in alternative finance, and auto loan and credit card companies, which have seen a boom in demand on the back of the growth of fintech.
The easy money environment created by alternative finance could result in tragedy
Needless to say, the responsibility for carelessly piling up debt lies with the borrower. But, it is also incumbent upon the lender to consider a customer’s economic situation when screening them for a loan. Assessing a customer’s ability to repay and preventing unnecessary liabilities is also in the interest of the lender.
The traditional standards of the loan industry are being eroded by the spread of fintech. Hitherto, financial institutions have determined the amount they are willing to lend and the interest rate charged based on the customer’s credit score (a system widely used in Europe and the US that numerically reflects an individual’s economic circumstances) in the case of individual borrowers, or, in the case of corporate customers, such criteria as the number of years the company has been in business, the industry in which it operates and the value of its assets.
However, alternative finance companies – with the intention of making loan screening fairer – often rely on screening methods that focus on the present and future, rather than the past, such as analysing a loan applicant’s smartphone usage to determine their ability to repay. Alternative finance companies often advertise the fact that their loan screening process is technology-based, but there are doubts about the accuracy of their screening algorithms.
In a nutshell, whilst the alternative finance industry’s USP is that it has created an environment in which it is easier to secure loans than it is from traditional financial institutions, this could end up overburdening people, especially young adults, with huge debt.
US Congressman Emanuel Cleaver, who is fearful of the risk presented by the alternative finance industry, is calling on alternative finance companies only to extend well-considered credit. It seems we need not only to urge consumers to exercise more consideration in taking on debt, but also to require lenders to give more consideration to their lending.