Money Motivations: What’s Making Young People Take Out Short Term Loans

Throughout adult life, there are many instances where an adult may need to take out a loan or seek other forms of financial assistance. For young adults, financial help may be required to buy a first home, a car or to pay for a university degree, amongst many other scenarios. However, with so many options available on the market, it can be difficult for young people to know where to turn, particularly if they have had a lack of financial education. For others, options may be limited, with some having to turn to high cost short term loans should they require financial assistance in an emergency. A 2019 report by the FCA has found that 33.4% of short term loan borrowers are aged 25-34, despite this demographic representing just 17.5% of all adults in the UK. This statistic highlights that an increasing number of young people may be taking out short term loans. But why? Here, we’re taking a look at the reasons why young people may be motivated to take out a short term loan.

Less Stable Incomes

The increasing use of zero hour contracts for employees in the UK since their inception in 1998 could be one cause for young people taking out short term loans. According to the Office Of National Statistics, as of October to December 2019, 9.1% of 16-24 year olds are employed on a zero hour contract in the UK, in comparison to 1.5% of 35-49 year olds. This highlights that are a larger number of young adults may be experiencing less stable incomes. While the flexibility of a zero hour contract is appealing to some workers, these types of contracts can result in unpredictable hours and insecure income. This could ultimately result in an increasing use of alternative financial arrangements, particularly in the event of a financial emergency, such as a payday loan.

Lower Incomes

Alongside having a potentially less stable income, many young people are not earning the amounts needed to cover increasing costs of every-day living.

Of the 3.4 million people aged between 18-24 in the UK currently in employment, many are said to be earning lower wages compared to their parents at the same age. This means that juggling these different financial aspects can be hard to maintain, whilst factoring in one-off costs such as gifts or clothing and leisure activities such as going out to eat or attending an event. Of course, this all depends on your financial outlook and what your priorities are. According to the Office for National Statistics, over 50% of 22-29 year olds stated that they had no savings within an account or cash ISA. This will have an impact on saving for a deposit on a house for example, with the same demographic less likely to own a property.

Rising Costs

Over the past 30 years, the cost of a typical shopping basket has roughly doubled, with other expenses having risen even further. For example, comparing 1990 to 2018, the average price of a pint of milk has increased from 25p to 44p, whereas the average price of a football ticket has increased from £5 to £43. Living costs also appear to be increasing faster for Britain’s poorest households, compared to the richest, with many low-income families experiencing a squeeze. If a young adult comes froma low-income family who are experiencing this, or they are struggling themselves due to insecure income, then this could be impacting the number who may seek additional financial aid from other sources.

Average rents across the UK are also on the rise, having increased by 1.8% in March 2020 on average when compared to the same month a year prior. In the capital, London rental prices have increased by 3.7% in March 2020 compared to March 2019. Further to this, house prices are rising at their fastest annual rate for nearly two years, with a rate of growth sitting at 4.1% as of February 2020. The increase in living costs makes it more difficult for young adults for save, and for even when they do, it means that their outgoings have the potential to be further inflated.

With the political and economic disruption many face as a result of scenarios such as Brexit and the COVID-19 pandemic, it can be unclear for many young adults how much they need to save, and are able to save, as costs continue to rise across the board. These rising costs could be a contributor to the increasing use of short term loans by young adults.

Limited Options Available

Some young adults may have a limited credit background which could result in being turned away for different types of financial assistance.

As a result, there may be limited options available for those who require assistance in a financial emergency. This could result in young adults looking at alternative options such as ‘bad credit loans’ in order to cope when faced with an unexpected cost, particularly when other options have already been sought out. However, applicants who apply for bad credit loans and other types of high cost short term lending are not guaranteed to be accepted, as reputable lenders do conduct credit score reviews and other affordability checks. It is important to remember that a high cost short term loan such as a payday loan should be turned to as a last resort option, and only when the borrower can afford to pay back the loan.

What Should You Consider?

Loans for young people can be helpful when managed correctly and are sought out for the right reasons, such as in the event of a financial emergency. However, it is important that all options are considered before a young adult seeks a payday loan or other kind of high cost short term loan option.

Financial education in young adults can be key to promoting proper money management skills which can better protect a young persons’ future. Further to this, seeking stable employment (where possible and when suitable) and budgeting correctly in the face of rising costs can also help to reduce the number of young adults who are having to resort to borrowing.

With 4 out of 10 people resorting to retail therapy for non-essential purchases and the average person in the UK spending £144,000 in their lifetime on impulse buys, this can quickly add up. For young people, in particular, thinking long term about financial goals is important, whilst working out if impulse buying is something you can really afford to continue. Making better choices towards financial security earlier in adulthood can make all the difference, setting up a bright financial future.