Many young people still end up paying high interest rates and risk falling into debt traps. Together they owe one billion kroner. A new research article introduces an analytical model to understand young people’s behaviour on the loan market
A new flatscreen or a beach holiday with friends even when the bank account is already empty? A new research article by Professor Torben Hansen from CBS examines young people’s borrowing behaviour. His study presents a model that banks, authorities and politicians can use if they want to analyse and understand why young adults take on expensive loans. His goal is to raise awareness among young people about the pitfalls of the loan market.
“Although fewer young people are ending up in credit registers because they cannot repay their expensive loans, many still borrow from alternative providers at interest rates of up to 25 percent. This is unfortunate, as it can delay young individuals in establishing themselves and saving up,” says Torben Hansen.
“And from a macroeconomic perspective, expensive loans also have consequences, because young people cannot contribute to the economic dynamics of society when their money goes to paying interest. So, everyone has an interest in limiting expensive loans – perhaps apart from the providers of quick loans,” he adds.
Torben Hansen, who researches consumer behaviour, points out that the loan market has become increasingly complex with many different loan types – also in traditional banks. On top of this, it is easy to take out fast digital consumer loans such as quick loans, SMS loans and ‘buy now, pay later’ schemes offered by alternative providers.
700 YOUNG PEOPLE TOOK PART IN THE STUDY
This is why the CBS researcher argues that young people should learn about loans and financial markets, either as part of the school curriculum or through campaigns similar to those targeting alcohol consumption, eating disorders and gambling. The focus should not only be on finance – but also behaviour. The study shows that young people’s financial trust and perception of social norms influence their borrowing choices.
“We need to teach young people about interest rates and budgeting. But we also need to help them resist their own impulses."——Torben Hansen, Professor
In his research project ‘Understanding Risky Borrowing Tendencies in Young Adults’, published in the international journal Young Consumers, he used two surveys. The first group consisted of 488 young people aged 18–25 who did not have a risky loan. The second group comprised 214 young adults of the same age who had already taken out an expensive loan.
Both groups were asked to assess their financial knowledge, trust in lenders and likelihood of taking out a risky loan. The results showed a clear tendency: the greater their financial skills, the lower their risk of harmful borrowing.
But this is far from the only factor influencing borrowing behaviour. Social norms and trust in lenders also play a significant role. Many young people assess whether it is acceptable to take out a loan based on what their friends and networks do. The study also shows that among young people who already have an expensive loan, their willingness to take out more quick loans decreases if they perceive them as risky.
IT IS ABOUT FINANCE BUT ALSO BEHAVIOUR
“Young people want to be part of a community and have a smart Apple computer and a new mobile phone like their friends. They are impulsive and easily tempted when it comes to loans, and that is nothing new. But because they are so impressionable, preventive efforts can work if they address social norms,” says Torben Hansen.
He therefore recommends that future initiatives targeting this group combine financial education with behavioural psychology.
“We need to teach young people about interest rates and budgeting. But we also need to help them resist their own impulses,” he says.
And although fewer young people are ending up on the Danish credit register RKI in recent years, the problem is far from solved.
YOUNG ADULTS IN DEBT OWE ONE BILLION KRONER
According to Finance Denmark, which earlier this year published the report “Young people – debt, consumption and savings,” at the end of 2024 almost 34,700 young people between 18 and 30 were registered in RKI as bad payers. Together they owe around one billion DKK.
This is a few thousand fewer than in 2021, when 37,000 young people were registered in RKI. The decline is probably due to the quick-loan law, which introduced a cap of 35 percent on the annual cost of a loan.
For Signe Gammeltoft, Project Manager at the Danish consumer organisation Tænk, which provides debt counselling for young people, it is of course positive that the number of bad payers has fallen. But like Torben Hansen she warns against assuming that the loan market is under control.
“We still see consumer loans as a problem. We know that financial difficulties have serious consequences for the individual. It is stigmatised and undermines self-esteem. And we can see that more young people with debt end up not having an education. They pay a financial as well as a social price,” says Signe Gammeltoft and recommends targeted initiatives close to young people – including initiatives that teach them it is ok to admit that there are things they cannot afford.
About the researcher
Torben Hansen is professor of consumer behaviour
His two main research areas are financial markets and the food market
He most recently published the article ‘Understanding Risky Borrowing Tendencies in Young Adults’
Key factors in the analytical model
Subjective norms: Young people are influenced by what they believe others do and expect.
Financial trust: Trust in banks and loan providers increases the likelihood of borrowing.
Financial health: The better the young person’s financial situation, the lower the likelihood of borrowing.
Loan risk: The riskier the loan feels, the less likely they are to borrow.
Loan complexity: No significant effect on behaviour
Facts about young adults in debt
At the end of 2024 almost 34,700 young people between 18 and 30 were registered in RKI.
This equals around 3.4 percent
Together they owe one billion DKK.
Around one in nine young people on Lolland end up in the Danish credit register RKI.
Lyngby-Taarbæk has the fewest young people registered in RKI