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Financial stress in Germany – effects on employees and employers

Nov 11, 2020

1. Over-indebtedness & financial stress in Germany

Financial stress in Germany is not uncommon. Based on analyses from Statista, 6.9 million citizens were over-indebted in October 2019, with an over-indebtedness rate of just under 10%. If the total debt burden is allocated to all inhabitants in Germany, the average debt burden per inhabitant is just under EUR 6,190, according to the Federal Statistical Office. As a result, last year more than 580,000 people in Germany sought help from debtor and insolvency advice centers because of their financial problems, and around 10.6 million employed Germans were unable to cope with unexpected expenses amounting to EUR 1,000 ad hoc. It is therefore not surprising that financial stress is one of the top 3 stress factors in Germany.

All of this data suggests that financial stress is an omnipresent topic among the German population. This raises various questions such as: what are the causes of financial stress, how does financial stress affect private and professional life, and how can financial stress be managed or even prevented?

2. Causes for financial imbalances and resulting financial stress in Germany

The first question that arises is, what exactly are the causes of financial imbalances and the resulting stress for employees in Germany? According to a study by the Universities of Mainz and Erlangen-Nuremberg, diseases, accidents or addiction are the main reasons for over-indebtedness for approx. one third of the interviewed clients of debt counsel services. In addition to these causes, low income, overpriced credit (e.g. consumer or overdraft loans), termination of employment or long pay cycles also play a decisive role when it comes to debt.

Long wage cycles in particular are always a crucial aspect when it comes to causes of debt due to unplanned costs. Here, it is important to distinguish between planned and unplanned costs. Financial burdens that can be planned for such as household, or housing costs (one quarter of household income is spent on rent), represent a significant portion of monthly costs, however they are not unexpected and represent a lower risk of unexpected financial distress. Unplanned costs, on the other hand, repeatedly present individuals with financial challenges due to the fact that the lack of money required to cope with them at the time is not available. If the time at which unplanned costs occur does not coincide with the employee’s payday, a financial bottleneck occurs for a certain period of time. It is particularly worrying if the employee has already earned their salary for a certain amount of days but cannot access it. Often, the only option is to go to friends and relatives, or to the bank.

3. Short-term loans as a faulty solution

Unexpected expenses consistently drag German employees into emergency situations and financial difficulties. Often there is a lack of alternatives and thus many individuals are merely left with the option of going to their bank. However, it is important to note that this is exactly where German banks profit. Officially, the wealth building of their customers is the focus of attention for banks. However, due to the current low interest rate environment, banks are focusing on pushing overdraft loans to generate high income. Overdraft loans are needed precisely when unexpected short-term expenses arise that customers cannot repay. If an overdraft loan is taken out at short notice, an average of 8-9% interest is due, which according to the Bundesbank has won banks in Germany a volume of around EUR 31 billion in overdraft loans – last year alone. In addition, overdrafts are not subject to any regulated repayment conditions, which means that customers often have to repay an overpriced loan over a long period of time. The high interest rates result in a debt trap. Those affected often have difficulties with repayment due to high additional fees. Consequently, the loan cannot be repaid over a long period of time and the debt cycle cannot be interrupted. The result of this vicious circle is financial stress, which affects both the private and professional life of individuals.

4. Effects of financial stress on employees and companies

The effects of financial stress are manifold and usually affect two sides. On the one hand, the employees and their private environment are affected, on the other hand, however, the employers of financially stressed employees are also affected.

Financial stress has a negative effect on the health of the affected individual. It is not unusual for those affected to suffer from sleeping disorders, mood swings, anxiety, headaches or even depression. However, it is precisely these effects that make it even more difficult for the affected to find their way out of financial stress. According to a study by the Universities of Mainz and Erlangen-Nuremberg, every seventh client in a surveyed debt counsel centre does not feel capable of coping with their debts in the foreseeable future due to the above-mentioned symptoms. Successful debt management, however, shows that the health of the affected clients is noticeably improved. Furthermore, isolation is often a further consequence of financial stress. Those affected can no longer participate in social life due to a lack of finances. Going to the cinema or having dinner with friends is no longer possible.

On the other hand, the working environment and consequently the employer of the individual are often directly affected. The effects range from a strong loss of productivity, to an increase in sick days, to rising employee turnover in the company. It is not uncommon for companies to incur considerable organisational expense, for example, through wage garnishment. All of these effects have one thing in common: they come at a cost of cash to a company. Due to additional expenses, loss of productivity and increased absenteeism, it is clear that the financial stress of employees has a direct impact on the balance sheet of a company.

4. What to do in case of financial stress?

The last question is of course: “what to do in case of financial stress?” Here it is important to involve all parties concerned in order to develop a holistic solution. Depending on the degree of over-indebtedness, it is important to act correspondingly.

Short-term insolvency

(1) In the event of short-term insolvency due to unforeseen financial costs, there are a few different possibilities. As mentioned above, a short-term overdraft facility can be drawn down. However, these are highly overpriced and therefore do not suffice as a long-term solution.

(2) In addition, the private environment is often asked to step in if there is financial need. This is usually not a very pleasant situation for both parties, as the person concerned has to reveal why they have found themselves in financial distress and the donor* feels obliged to lend money. In the long run, this can put a strain on the relationship between both parties.

(3) If neither of these possibilities is an option for the person concerned, going to the employer is also an option. The employer can be asked for an employer loan or an advance on wages. However,  this at often times includes shame and the honesty towards one’s own privacy, which is why going to the HR department is often not considered a feasible option.

This is exactly the problem we have been addressing since mid-2020.  Our startup LaraPay, is Germany’s first app that enables employees to get direct access to their already earned salary at any time. LaraPay  is offered to employees through their employer to create a trustworthy relationship. Once employees have downloaded and successfully registered, LaraPay enables them to anonymously receive their already earned salary. At the end of the month the earned salary is automatically calculated and the difference is transferred as usual. This enables employees to access their earned wages, even at short notice, to overcome financial bottlenecks easier, faster and above all cheaper.

4. Overcoming, over-indebtedness

For over-indebted individuals it is important to first recognise and accept over-indebtedness. This is often easier said than done, as feelings of shame or discomfort often delay or even prevent this step. In order not to feel isolated in the situation, seeking debt counselling can be very helpful. What many are unaware of is that a number of consultations are offered free of charge and without obligation. Caritas, for example, offers free online debt counselling.  Another potential solution is the rescheduling of high overdraft loans in order to be able to repay the debt in the long term.

To summarise, financial stress in Germany is omnipresent. Countless employees are struggling to pay unexpected monthly costs of up to €1,000, which often leads to a variety of health problems. However, not only employees are affected by financial stress. Employers also suffer as a result of financially stressed employees as their level of productivity decreases or sick leave increases. In the short-term, companies like LaraPay that offer early-wage access can resolve financial problems and decrease financial stress. In the longterm, financial education as well as a continuous savings plan can make a huge difference in alleviating the financial stress burden.

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