There is a distinct lack of understanding about borrowing among young adults in the UK, according to the results of a nationwide survey of borrowers by Arrow Global, a European purchaser and manager of debt portfolios.
The research found a lack of understanding among 18-24 years olds on basic issues such as how debt interest works and the importance of repaying their debt.
It found that 51% of 18-24 year olds have increased their borrowing in the last five years. The most common form of debt for young adults is a student loan: 59% of borrowers in this age group have a student loan, with an average balance of £21,101. Of this group, 61% say they do not know what the current interest rate is for the loan.
Meanwhile, 26% of 18-24 year olds who have sought a loan (of any kind) do not know what APR means and a further 40% see it as having little or no importance. This contrasts strongly with older generations, for example of those aged (55+) just 1% do not know what APR is and 78% see it as important.
While failing to repay a debt on schedule can have major implications, including making it harder to get a mortgage or other debt in future, 45% of young adults say it is not very important to repay their debt on time, compared to 73% of over 55s.
The research also revealed a poor grasp of basic numeracy that is important for understanding borrowing. 22% of 18–24 year olds do not know how to calculate 15% of 200, implying little understanding of what the interest rate on a loan means. In comparison just 9% of over 55s could not make this calculation.
While the lack of understanding about borrowing was particularly acute among 18-24 years olds, the research found that older borrowers also suffer from a basic lack of understanding about their debt. 26% of all UK adults with debt don’t know what interest they pay on their mortgage, rising to 43% who don’t know the rate on their bank overdrafts.
Tom Drury, CEO of Arrow Global, said:“Borrowing is often necessary for young adults getting started in life, whether it is to fund higher education or to finance purchases to get started in a job or new home. But anyone borrowing money needs to understand exactly what they’re doing. It is concerning to see that so many young people don’t have an understanding of the basics of borrowing and debt. A lack of understanding is less extreme but also worryingly evident in older age groups.
“One of the problems is that debt is a taboo subject in Britain. We need to talk more about it so that everyone understands how to borrow and manage their finances effectively, without taking on more debt than they can afford to repay. Debt charities do a fantastic job of educating people when their debt becomes a problem for them. But this conversation needs to happen earlier in life so that everyone understands how to use debt positively and not risk it being a problem they simply don’t understand.
“Debts can get out of hand for all sorts of reasons that are hard or even impossible to plan for, such as unexpected illness or a bereavement. In these situations, it is not a lack of understanding about debt that causes a problem. The problem that can be fixed is when people end up in more debt than they can repay because they didn’t understand the implications of their borrowing.”