19 October 2018
The consumer council said research shows a close link between indebtedness and excessive consumption for the sake of enjoyment. Photo: HKEJ/Consumer Council
The consumer council said research shows a close link between indebtedness and excessive consumption for the sake of enjoyment. Photo: HKEJ/Consumer Council

Overspending leads to debt trap, watchdog warns young people

Young people should avoid spending more than they earn and borrowing more than they can pay back so they won’t get caught in a debt trap.

The Consumer Council issued this warning after noting a rising number of complaints against financial services that use enticing ads to lure people into taking loans.

These firms promise low interest rates, easy payment terms, high borrowing limits and quick approvals, but charge hidden fees and impose hefty penalties for those who are unable to pay back the loans.

The watchdog said the market has been flooded with sugar-coated loan ads, many of which target young people, who don’t seem to consider whether they have the capacity to pay back what they have borrowed, the Hong Kong Economic Journal reports.

In the first nine months of the year, the council received 41 complaints regarding private loans and services provided by so-called financial intermediaries, involving a combined amount of nearly HK$4.5 million.

In one case, a person who borrowed HK$130,000 from a financial intermediary and applied for debt restructuring and bankruptcy was asked to pay HK$70,000 as processing and lawyer’s fees.

In another case, a financial intermediary asked a borrower to pay back HK$430,000 for a HK$250,000 loan.

Gilly Wong Fung-han, the council’s chief executive, said a study it conducted showed that many people, especially young ones, are easily enticed by loan ads because of excessive consumption which ultimately leads to heavy debt burden.

A survey conducted by the Investor Education Centre (IEC) in April this year, which interviewed 500 working adults aged between 18 and 29, revealed that three in ten of the respondents were in debt in the past year, with an average sum of HK$37,000.

About 88 percent of the respondents owned a credit card, and one in five was unable to settle their debt in full each month.

Another survey by the IEC found that the top two reasons why people took personal loans were to buy their favorite items (28 percent) and leisure and entertainment (17 percent). This suggests a close link between debt and excessive consumption for the sake of enjoyment.

The council’s own survey conducted last year found the frequency of online purchases by respondents was once every 10 days on average, and the average amount they spent was HK$800.

Young people in the 25-34 age bracket were the group with the highest ratio of online purchases (46 percent).

Wong urged young people not to borrow more than they can pay because that could lead to bankruptcy, a situation that will have a far-reaching impact on their lives.

Bankruptcy prevents people from professional jobs, such as being a lawyer or real estate agent, and makes it harder for them to get their mortgage loan applications approved, she said.

Wong urged young people to think twice before they make consumption decisions.

The council plans to launch a six-month research next year to further understand Hongkongers’ borrowing behavior and study what other countries do to curb loan ads.

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