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.
Financially vulnerable people losing last resort to get loans
The logos of major credit card issuers are seen on the entrance of a restaurant in Seoul in this file photo. Korea Times file
By Yi Whan-woo
By Yi Whan-woo
During the second half of 2021, a local newspaper warned in an editorial of the serious nature of the surging number of pandemic-hit small business owners scrambling to borrow from private lenders after they were denied by banks and institutional lenders.
That situation, however, was perhaps more favorable than what the cash-strapped borrowers now face, amid toughened conditions for taking out loans from lenders of last resort in the wake of the latest benchmark interest rate hike in late January.
The rate hike set off a chain of events, prompting credit card firms, a popular destination among non-banks by low-credit customers to get a quick cash loan, to consider raising their annual interest rates above 15 percent on average in the coming months.
Currently, credit card issuers ― Lotte, Samsung, Shinhan, Woori, Hana, Hyundai, KB Kookmin and NH NongHyup ― set their respective interest rates in the range between 12.1 percent and 14.94 percent, according to the Credit Finance Association.
Financial sources view this range as “drastic” compared to the average of 12 percent in the past.
The signboards of private moneylenders are seen on a building in Seoul in this file photo taken in July 2021, when the maximum legal interest rate was lowered from 24 percent to 20 percent. Korea Times file
Private moneylenders are becoming picky about customers and are making sure in advance whether the borrowers are capable of paying back the loans.
This is because the lenders have had to observe the lowered legal lending cap of 20 percent since July 7, 2021, down from 24 percent in 2018, while paying a higher interest rate than in the past when borrowing money from banks and upper-level lenders to secure capital.
The situation has resulted in a less secure profit-making environment, when their customers, who are virtually all cash-strapped, fail to make payments on time.
Those lenders are shifting away from credit loans accordingly and increasingly prefer collateral loans, meaning the customers can't borrow money if they do not have real estate, cars or other assets to assure their repayment capabilities.
According to the Financial Supervisory Service (FSS), the size of the private moneylending market has been on a downward trajectory, from 17.34 trillion won ($14.37 billion) in 2018 to 15.91 trillion won in 2019, 14.53 trillion won in 2020 and 14.51 trillion won in June 2021.
The number of borrowers also declined from 2.21 million in 2018 to 1.23 million as of June 2021.
On the other hand, the proportion of collateral loans surpassed credit loans 51.9 percent to 48.1 percent, out of the total amount of loans worth 14.51 trillion won at the end of the first half of 2021.
This was the first time the FSS has observed collateral loans exceeding credit loans.
Specifically, the portion of collateral loans was up from 32.2 percent in 2018.
“Under the circumstances, the government should thoroughly analyze risks faced by financially vulnerable individuals, and come up with support measures to ensure they are no longer marginalized,” said An Dong-hyun, an economics professor at Seoul National University.
He said the government's support is especially critical as the Bank of Korea signaled a further hike in its key interest rate. It is currently back to the pre-pandemic level of 1.25 percent.
Park Young-bum, an economics professor at Hansung University, speculated additional lowering of the maximum legal lending rate could trigger the private moneylenders operating within legal boundaries to tighten lending conditions.
He referred to multiple bills pending in the Assembly seeking to cut the maximum legal lending rate to as low as 10 percent.
“The situation can push low-credit individuals to borrow money from loan sharks,” the professor said.
Lee Jae-myung, the candidate of the ruling Democratic Party of Korea (DPK), has also been pledging to lower the rate to the 10 percent range.