Koreans in 20s take out loans most with highest subrogation rate

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The young generation in their 20s have emerged as the largest age group resorting to government loans offered to low-income, low-credit borrowers as well as they make up the largest group of insolvent borrowers, for which the government paid off the principal and interest on a loan on their behalf.

This trend comes as the youth undergo severe job shortages following the pandemic and are hit harder than other age groups by high interest rates and the economic slowdown. An analysis shows that, for this reason, one out of four subscribers of the Youth Hope Savings Account, which was designed by the government to help young people save money, canceled his or her account due to financial difficulties.

According to data of the office of Representative Yang Jung-suk obtained from the Korea Inclusive Finance Agency on Wednesday, out of a total of 2.92 million applicants for the seven major low-income financial loans, including workers sunshine loan, sunshine loan youth, sunshine loan bank, sunshine loan 15, and special guarantee for lowest credit borrowers, between 2018 and the first quarter this year, the number of applicants in their 20s or younger was 1,092,234, accounting for 35.3 percent, the highest among all age groups.

Those in their 30s took up 26.9 percent and 40s 20.4 percent. The average approval rate for products after application was 94 percent. In the case of small loans for livelihood that lend up to 1 million won, the number of applicants in their 20s was 725 out of 5,711, accounting for 12.7 percent of the entire group.

Those in their 20s were also most severely affected in terms of loan defaults. In March, the subrogation rate for workers sunshine loans was 11 percent for those in their 20s. The government pays banks a percentage of its guarantee when borrowers fail to repay their loans. While the subrogation rate for other age groups, including those in their 30s, have remained largely unchanged over the past one year or two, that of those in their 20s has seen a marked increase to 10.7 percent in 2022 from 10.5 percent in 2021 and 10.2 percent in 2020.

Analysts say that the increase in the number of young people applying for low-income financial products before and after the pandemic has led to an increase in delinquencies. “It is not easy for people in their 20s to take out loans from commercial lenders because of their short financial transaction history and low income or credit scores,” said an unnamed bank official. “It is also likely that less disposable income of people in their 20s due to high inflation and interest rates post the pandemic has contributed to the greater use of low-income loan products.”

Concerns are also raised that the risk of household debt is increasing as the rate of subrogation among young people grows. In particular, products targeting low-income households are proactively marketed by regional banks, savings banks, mutual financial institutions and online banks, at which delinquency rates have recently been rising more than those of commercial banks, presenting a greater burden to manage financial soundness.

“The large number of applicants in their 20s for the government-led financial products and the proportionally increasing delinquency rate are related to the job shortage,” Yang said. “It is urgent that we take measures to provide high-quality jobs that young people are looking for.”

The lack of financial resources among the younger generation is proven by the fact that 24 percent of the subscribers of the Youth Hope Savings Account closed their accounts although the program drew a subscription rush over a year ago. The program is designed to offer up to 10 percent annual interest rates for those who meet the two-year maturity, and about 2.9 million people signed up, 7.6 times more than the government‘s initial estimate of 300,000. However, the product was eventually canceled by many young people as their financial conditions worsened.

According to the data of the Financial Supervisory Service on the status of the Youth Hope Savings Account submitted to Representative Kang Min-kuk, the number of initial subscribers for the program was 2,895,546 when it was launched in February last year. However, 684,878 subscribers, or 23.7 percent of the total, closed their accounts, as of the end of May.

The closure rate varied by monthly payment. Those who paid less than 100,000 won ($77.28) per month had the highest cancelation rate at 49.2 percent, followed by those who paid more than 100,000 won and less than 20,0000 won per month at 48.1 percent. The number was the lowest among subscribers who had the highest monthly payment of 500,000 won at 14.8 percent.

The Bank of Korea said in its 2023 H1 Financial Stability Report that concerns have grown as savings banks have increased loans to vulnerable borrowers, particularly young people. Loans to vulnerable borrowers at the end of last year jumped 51.6 percent from 2019 for those in their 20s and 30s, the highest increase among all age groups.