2023-11-12 10:29:32
All rich in Luxembourg? Far from it, recalls a study by the Central Bank (BCL), which notes that Luxembourg is the European country where consumer debt is most widespread among low-income households.
Of course, when we think of “debt in Luxembourg”, we first think of housing, which weighs heavily on residents’ debts. But we talk less about other forms of debt, starting with consumer debt. Either it’s about buy a car, finance unforeseen work on the home, temporarily bail out when the salary is no longer enough, or to “treat yourself to a little splurge”, the fact remains that these debts can quickly weigh down our finances. Especially since the interest rates for these loans are often steep!
However, in Luxembourg, a significant part of the population has fallen into this trap. So much so that Luxembourg is the European country “where consumer debt is more prevalent among lower-income households“, reports the Central Bank of Luxembourg in a recent publication.
This consumer debtheld by 35% of households, is more common than mortgage debt (owned by 31% of households). More than 13% of households hold both mortgage debt and consumer debt.
A lot of residents go into debt to buy a vehicle
The main component of consumer debt are personal loans, held by 26% of households in Luxembourg (20% in the euro zone). The average level of personal loans is twice as high in Luxembourg as in the euro zone. Among the lowest 20% of households, the level in Luxembourg is even three times higher than in the euro zone.
On average, personal loans represent only 16% of gross household income in Luxembourg, which is comparable to the euro zone (17%). Furthermore, in Luxembourg 70% of households are making progress purchasing a vehicle as the main reason for their personal loan, a reason cited by only 38% of households in the euro zone. This difference still provides an explanation for the higher level of personal loans in Luxembourg.
Credit cards: sometimes “irrational” choices
A second component of consumer debt is credit card. In Luxembourg, nearly 84% of households have credit cards, almost twice as many as in the euro zone. However, only 5% of households use these cards to accumulate debt, in Luxembourg as in the euro zone. In general, the probability of owning a credit card increases with household income and education level. This probability also increases among households who consider themselves subject to credit constraints (around 7% of households, whether in Luxembourg or in the euro zone).
According to 2018 HFCS data, more than 90% of households with accumulated credit card debt had positive balances in their bank accounts. More than 70% of these households had enough money to pay off their credit card debt. “This behavior seems irrational, when we compare the very high interest rate that households pay when they accumulate credit card debt to the low returns they earn on their checking and savings accounts.“. The results indicate that “this behavior can be explained by differences in risk aversion and by fears of a future tightening of their access to credit“.
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