Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Up to 90,000 Koreans denied loans from lenders of last resort
Police officers dump a pile of flyers confiscated from illegal lenders in Suwon, Gyeonggi Province, onto the floor in this July 2022 file photo. Yonhap
By Yi Whan-woo
Paradox of lowered interest rate ceiling
Up to 90,000 Koreans were refused loans from banks, credit card firms and institutional lenders, as well as lower-tier private money lenders operating within legal boundaries, due to their low credit ratings, a study showed Tuesday.
Released by the Korea Research Institute for Financial Inclusion, the study also showed that low-credit individuals had to borrow money from loan sharks that imposed more than a 1,200 percent yearly borrowing rate.
According to the study, 53,000 individuals whose credit ratings fell between six to 10 had no option but to rely on loan sharks for money last year as they were denied loans even by private lenders.
In Korea, an individual's credit rating is evaluated on a scale of one to 10, with one being the highest.
The study went on to say that as many as 91,000 individuals whose credit ratings fell between six and 10 are estimated to have borrowed money from loan sharks.
The number is the highest since 71,000 borrowers recorded in 2022.
The amount of borrowing from loan sharks by individuals with a low credit rating in 2023, is estimated to be between 830 billion and 1.43 trillion won.
In 2022, the amount was around 1.23 trillion won.
"It appears that the high benchmark interest rate and tougher terms and conditions when taking out loans from private money lenders are pushing the financially vulnerable to have no one to rely on," the institute said.
It pointed out that the Bank of Korea's (BOK) key interest rate — beginning from January 2023 — remains unchanged at 3.5 percent, which is the highest since December 2008.
Concerning private lenders, they have been reluctant to lend money to financially vulnerable people. This is because the lenders have to pay a higher interest rate due to the BOK's rate hike when borrowing money from banks and upper-level lenders while observing a lowered legal lending cap when they lend their money to customers. They have been allowed to levy only up to 20 percent annual interest since July 2021, when the legal lending cap was slashed from 24 percent.
Of the aforementioned borrowers in 2023, more than 50 percent responded that their yearly interest payments exceeded their principal.
And 10.6 percent of all borrowers were burdened with an annual interest rate of 1,200 percent or higher, the institute noted.
To help low-credit individuals, the institute suggested opening the door for more private money lenders to acquire licenses to operate legally.