Lenders warn Gen Z not to be their best friends’ private bank anymore, because “shadow debt“ lowers the chances of homeownership.
What is this new type of debt? According to a study by the digital payment service Zelle, 76% of Gen Z have previously covered costs at group events among friends that they never got back from their friends.
- 18% report that it can take up to a month for someone to pay them back
- 10% report that it can take two to six months
- 11% report that it can take longer than six months
47% of Generation Z say they have taken on debt to cover group costs. This kind of often invisible financial burden is called shadow debt because it occurs in an informal setting without a written contract or fixed repayment plans, usually with only a verbal promise from the respective friend to repay.
How does this affect homeownership? As Lisa Lund, a U.S. mortgage broker, noted to the real estate website realtor, these shadow debts pose a mortgage problem.
Lenders only see the negatives and do not assess whether a friend’s promise to repay is present. They see no asset, only a credit balance and the corresponding monthly minimum payment.
Higher revolving credit balances can increase your credit utilization and worsen your credit score. This drives up the monthly debt repayments, which can in turn affect your debt-to-income ratio and your borrowing capacity. Lenders typically look at the debts you are responsible for today – not the cash your friends plan to repay in the future.
In short: Shadow debts worsen credit scores and drive repayment rates up, according to lenders. Additionally, taking on group bills prevents that money from being consistently saved.
For regular savings, Lund sees the biggest challenge for acquiring a home: “Those who save consistently and automatically for their own home often reach their milestones earlier – even if they enjoy going out occasionally.”
Realtor itself found in a study that by 2025, around 25 million adults under 35 would be living with their parents in the U.S., with 7 in 10 being employed. Most cited housing costs as preventing them from living independently.
Moreover, young people today would need to save around 9.7 years for the down payment on a property. In 1990, the duration was significantly lower at an average of 3.2 years (via realtor). This is primarily due to the fact that property prices have risen much faster than incomes.
The housing market also poses a problem for Generation Z in Germany – and not just when it comes to buying homes. As early as 2024, we reported on MeinMMO that many young people face difficulties affording rent due to rising rental prices. More about this here: Generation Z currently faces two major problems, one of which cannot be solved without help
Your opinion is important to us!
Do you like the article? Then let us know!