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.
Talk of reducing legal lending cap to gain ground
Leaflets for unauthorized private money lenders are scattered on a street in Myeong-dong, Seoul, in this undated photo. Korea Times file
By Yi Whan-woo
The new government is drawing attention over whether it will lower the yearly lending cap from 20 percent to make borrowing money more affordable for low-income, low-credit individuals.
President Lee Jae-myung and the ruling Democratic Party of Korea (DPK) have been open to the idea of overhauling the maximum lending rate for years, although it was not included on the list of Lee’s election pledges.
“Lee was believed to have deliberately excluded the issue due to its sensitivity, but as president, he is in a more favorable position to discuss and materialize the relevant reform,” said Shin Yul, a political science professor at Myongji University.
Shin noted the dispute over whether to cut the legal lending cap centered on whether it would backfire on low-income, low-credit individuals, who often end up having fewer places to get a quick cash loan.
When these financially vulnerable customers are refused loans from banks, credit card firms and other institutional lenders, they end up relying on private money lenders that offer high lending rates within legal boundaries.
On the other hand, private money lenders, as a strategy to ensure their profit margins, have a tendency to tighten their lending rules when the legal lending cap is reduced.
The embattled customers then have no option but to rely on loan sharks, which, according to the Korea Finance Consumer Loan Association, impose lending rates of 503 percent on average, as of 2024.
A separate study from the Korea Institute of Finance showed that up to 38,000 people were pushed out of the legally permitted lending market and driven into the illegal market in 2021 when the lending cap was lowered from 24 percent to the current 20 percent.
“Given this fallout, it was wise for Lee not to address the issue of the maximum lending rate when he was a presidential candidate,” Shin said. “And the time is possibly right for Lee to draw a consensus from financial and political circles.”
Jeong Se-eun, an economic professor at Chungnam National University, voiced a similar view.
“The discussions of slashing the maximum lending rate could very well take place under the new administration,” he said, adding the Bank of Korea’s (BOK) eased monetary policy “further justifies the need to lower the lending cap.”
Lee pledged to lower the lending cap below 20 percent in his earlier presidential campaign in 2022, when he lost to his predecessor Yoon Suk Yeol.
Kim Nam-kook, a former DPK legislator, proposed in 2020 to amend laws on restricting the interest rate as well as loans to slash the lending cap to 10 percent.
Additionally, two DPK legislators — Moon Jin-seog and Seo Young-kyo — also proposed amendment bills aimed at lowering the cap.