Efficacy of loan transfer service remains questionable

The Korea Times

The Korea Times

Finance

Mon, October 2, 2023 | 07:39

Economy

Efficacy of loan transfer service remains questionable

Posted : 2023-06-08 16:10

Updated : 2023-06-09 07:35

A savings bank offers to transfer the remaining balance of this reporter's loan on the Toss application. Screen capture from Toss

By Lee Min-hyung

The Financial Services Commission's (FSC) much-hyped loan transfer service appears to come with little efficacy, as those desperate to cut interest burdens cannot use it effectively because of tight debt service ratio (DSR) rules here.

The FSC opened a loan replacement service on May 31, with a view to reducing the interest burden of households. The service allows debtors to compare the loan interest rates of various financial firms at a glance, so they can transfer remaining loans to other products that offer lower interest rates.

But most people who took out a loan of around 100 million won have failed to transfer their loans by using the service. Starting from July 2022, those whose total loan exceeds 100 million won ($76,600) are subject to a 40-percent DSR cap regulation. Under the toughened rule, principal and interest payments on loans should not exceed 40 percent of a borrower's annual income when his or her total debt tops 100 million won.

According to data from the Bank of Korea, the portion of borrowers who received loans over the cap reached around 30 percent as of the end of last year. This means three out of 10 debtors are unlikely to benefit from the service.

This was the case for the reporter, as no financial firms provided loans with lower interest rates possibly due to the DSR cap. Only a savings bank ― which is considered a second-tier financial firm whose interest rate is much higher than first-tier ones, such as banks ― offered to transfer some remaining loans with interest rates twice as high.

Despite the complaints from debtors, financial authorities reiterated their strong will to maintain the DSR regulation to control the nation's household debt stably.

"We do not have any plans at all to alleviate the DSR regulation on loans, and the stance will remain in place as financial firms should also maintain their financial soundness," Finance Minister Choo Kyung-ho said Thursday.

According to data from five major commercial lenders here, the balance of household loans reached 677.6 trillion won as of the end May, up 143.1 billion won from a month earlier. This was the first time in 17 months that the figure rose.

One upside of the service is that debtors can conveniently compare interest rates offered by financial institutions via smartphone applications. But the mobile-focused access makes it tough for many middle-aged and older people ― who are not comfortable with passing financial apps' complex authentication processes ― to use the service.

mhlee@koreatimes.co.kr