What is really driving young Koreans into debt?

Lee, a graduate student, took out a Sunshine Loan to cover tuition and living expenses. While juggling her studies and work in a laboratory, she was forced to quit her job because of health problems. She had been making ends meet by working as a restaurant server, but when she fell short of money for living expenses, she eventually turned to a credit card loan.

Her outstanding debt stands at 17 million won ($12,500). Of that amount, the greatest burden comes from 4 million won in credit card loans carrying annual interest rates of more than 15 percent. She earns 2.5 million won a month but spends 1 million won solely on interest payments. She looked into refinancing so she could at least pay off the credit card loan, but could not find a loan available to her at her current credit level.

According to financial authorities on Sunday, 1,637,532 people have loans from three or more financial institutions. Of these, 342,690 are people in their 20s and 30s, accounting for 20.9 percent.

There has been speculation that anxiety over an overheated asset market has driven young people into debt. But the analysis found that unexpected spending and income shocks, including inherited family debt, illness and employment disruptions, were more significant.

KakaoBank, the Social Solidarity Bank and the Credit Counseling & Recovery Service launched an experiment from April through July to provide loans of up to 5 million won ($3,680) at an annual interest rate of 1 percent to borrowers who had been rejected by the existing mainstream financial system.

Called "Project Again, Spring," the program targeted multiple-debt borrowers aged 19 to 39 who were unable to obtain loans. Applicants had to have incomes at or below 120 percent of the median income.

A total of 1,432 people applied. The three institutions assessed their financial conditions, the circumstances that led them into debt and their willingness to repay, among other factors, and ultimately provided loans to 188 applicants.

The Hankook Ilbo obtained the first-year performance report for the project with anonymized loan applications, and analyzed the circumstances of the 1,432 people who had been pushed out of mainstream financial institutions. The loan applications they submitted provide a detailed picture of the reality facing young people burdened by high-interest and multiple debts.

Trapped in high-interest loans averaging 16 percent

The median applicant had five loans totaling 26.62 million won. Of that amount, the median balance of high-interest loans carrying annual interest rates of 10 percent or higher was 15 million won, while the average interest rate on high-interest loans was 16 percent.

Applicants had a monthly income of 2.5 million won on average, and spent 610,000 won solely on principal and interest payments.

Fifty-two percent of applicants had credit scores below 600, a level at which they could not even obtain a credit card, while 66 percent had already borrowed from private moneylenders. As many as 32 percent were unable to pay rent or utility bills, and 20 percent were making ends meet by working two jobs.

Some 22.6 percent of applicants had inherited debt from parents' or other family members who had experienced illnesses or business failures.

Another 21.8 percent of young people had been driven into multiple debt because they could not cope with accumulated living expenses.

"Spending shocks," including family debt and sudden illnesses, affected 32.1 percent of applicants, while 20.0 percent experienced "income shocks," such as employment disruptions or business failures. Problems such as overspending, excessive investment and gambling accounted for less than 10 percent.

Choo, a university student, was a representative case. After his parents lost their jobs, he became the family's main breadwinner. In his application, he said he planned to increase the number of part-time jobs he worked on weekdays while continuing his studies and obtain professional certifications that would allow him to increase his income.

Song lost 70 million won ($51,470) in a rental deposit housing scam. He worked two jobs for four years and completed the Credit Counseling & Recovery Service's individual workout program, but applied for another loan.

Young multiple-debt borrowers did not necessarily start out relying on high-interest loans. Their first loan was often a relatively small amount from a bank, around 3 million won ($2,210), but as their financial situations failed to improve, they increasingly turned to second-tier financial institutions such as savings banks, finance companies and credit card companies.

Kim, who is raising a child alone, took out her first loan in 2018, borrowing 2 million won ($1,470) from a bank. After experiencing unpaid wages at the company where she worked and losing her severance pay, she found herself struggling to make ends meet and turned to second-tier financial institutions. At one point, she took out seven savings bank loans within a single month.

Fortunately, she has been receiving a steady paycheck from a new job, but she continues to struggle with high-interest debt. Eight years later, Kim has 11 outstanding loans totaling 55.98 million won, with loans from second-tier financial institutions accounting for 67 percent of the total.

An analysis of the borrowing histories of 341 people who had seven or more outstanding debts found that the share of bank loans fell from 73.5 percent for their first loan to 64.6 percent by their seventh. Meanwhile, the share of loans from second-tier financial institutions rose from 18.9 percent to 29 percent.

It took an average of 5.2 months for borrowers to take out a second loan after their first. But the intervals gradually shortened, with the seventh loan being taken out just 2.3 months after the previous one.

This means that borrowers are increasingly finding themselves needing to take out another loan sooner because the money they borrowed previously was not enough to resolve their financial difficulties.

This article from the Hankook Ilbo, the sister publication of The Korea Times, is translated by a generative AI system and edited by The Korea Times.