SINGAPORE – Young adult personal debt here has increased during the Covid-19 pandemic and the situation could worsen once interest rates rise.
Data from the Singapore Credit Bureau showed that while credit card borrowing did not vary significantly, people in their twenties have increasingly borrowed other debt since the second quarter of last year.
The data showed that the average personal loan and overdrafts of those under 30 were up around 23 percent in the first quarter of this year from the last three months of last year.
Average personal loan and overdrafts for borrowers ages 21-29 shot to $ 49,689 in the first quarter of this year, about 42 percent higher than the average of $ 34,941 in the first quarter of last year.
Singapore’s credit limits were capped in 2015 to keep unsecured debt in check.
The recent higher debt could have been fueled by low interest rates, experts said.
Associate Professor Yu Yinghui, director of the Master of Finance program at the Singapore University of Social Sciences, noted that the government has capped the annual APR rate on unsecured personal loans at 8 percent since last April under Covid-19 supportive measures.
But unemployment and lower incomes could also drive young adults with fewer resources to personal loans and overdrafts as they try to borrow a way out of the crisis, experts found. In March, the unemployment rate for residents under 30 was 6.4 percent.
Associate Professor of Finance Song Changcheng of the Lee Kong Chian School of Business at Singapore Management University said, “When it is due to youth unemployment, it is often temporary people and helps small firms hire young people.”
Or it could be because many are employed on paper but do part-time jobs or food deliveries that don’t pay enough.
Prof. Song highlighted research showing that most workers worked fewer hours or made wage cuts over the past year instead of becoming unemployed.
OCBC Bank chief economist Selena Ling said the impact of rising personal indebtedness on younger people would depend on when things turn.
“If they get permanent employment afterward, they can pay off the debt, but extending the term can increase loan defaults or default rates,” she added.
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Assistant professor of finance Ruan Tianyue at the National University of Singapore Business School said loan default rates could rise if interest rates rise.
Currently, the overall crime rate for this age group is still low, so it is difficult to say if there could be any more bankruptcies among the youth, she added.
Data from the Credit Bureau Singapore (CBS) showed that the credit default rate for those under 30 rose 13.4 percent in the first quarter of this year compared to three months earlier.
The interest rate refers to the percentage of borrowers whose payments are 30 days or more past due.
The overdraft rate increased by 12.8 percent over the same period.
CBS CEO William Lim noted an “increase in credit consumption for mortgage loans, personal loans and overdrafts from this younger segment” in the first quarter of 2021.
“We believe this could be because they are more active again after the pandemic-ridden 2020 and possibly higher property prices.”
CBS data also showed that mortgage debt for this age group was 2.6 percent higher in the first quarter of this year than in the last three months of last year.
But average credit card spending fell 5.6 percent over the same period.
This article was first published in The Straits Times. Permission is required for reproduction.
