[Financial Essay] Must-Read Before Turning to ‘The Last Resort’ Loan Companies

Source: Financial Supervisory Service

[Asia Economy Reporter Kim Min-young] The spread of the novel coronavirus infection (COVID-19) is casting a shadow over the economy of ordinary people. Low-credit individuals in urgent need of funds are knocking on the doors of licensed lending companies, considered the 'last bastion' within the formal financial sector. It is preferable to explore loans from primary and secondary financial institutions such as banks, savings banks, and card loans first, but if you must resort to lending companies, here are some essential points to know. The following is based on the "10 Commandments Useful for Users of Lending Companies" announced by the Financial Supervisory Service in February.

◆ First, check if you can use government-supported financial products = Before visiting a lending company, first verify whether you qualify for public financial products for ordinary people. Banks and savings banks offer loans at annual interest rates ranging from 4.5% to 17.9% to individuals with credit ratings between 6 and 10. Depending on loan limits, occupation, and loan purpose, products such as Saehope Hope Loan (5 million to 30 million KRW), Sunshine Loan (15 million KRW for workers, 20 to 50 million KRW for business owners), Sunshine Loan 17, and Microfinance (3 million to 70 million KRW) are available.

Personal credit information required to check eligibility can be accessed for free up to three times a year, and checking credit information does not affect your credit rating.

◆ Only use registered lending companies = Using unregistered illegal private loans can lead to damages such as high interest rates and illegal debt collection. Therefore, you should use lending companies registered with the Financial Services Commission, Financial Supervisory Service, or local governments. You can verify registered lending companies on the Financial Supervisory Service portal "Fine."

◆ Loan interest rates higher than 24% per annum are illegal = Since February 8, 2018, the legal maximum interest rate is capped at 24% per annum. Any loan interest rate exceeding this maximum is illegal, and you can claim a refund for the excess amount. All money received by lending companies related to loans, including service fees, discount fees, commissions, deductions, and overdue interest, is considered interest.

◆ Carefully check loan conditions and always receive a loan contract = When signing a loan contract, carefully review conditions such as interest rate, overdue interest rate, repayment method, and loan period, and make sure to receive a loan contract. Regarding the loan period, if you enter into a long-term contract, you may not benefit from future reductions in the maximum interest rate, so it is necessary to set the period according to your funding needs.

◆ Never pay loan brokerage fees = Loan brokerage fees are borne by the lending company, and demanding such fees from borrowers is illegal.

◆ Do not use companies that require personal joint guarantees = For lending companies registered with the Financial Services Commission or Financial Supervisory Service, the practice of requiring joint guarantees was abolished as of January 1 last year. Personal loans (except some corporate loans) do not require joint guarantees.

◆ Overdue interest rates cannot exceed the agreed interest rate plus 3 percentage points = Following the amendment of the Lending Business Act on June 25 last year, the overdue interest rate on loans from lending companies is limited to within 3 percentage points above the agreed interest rate.

◆ If you receive repayment demands for old debts, check whether the statute of limitations has expired = When receiving repayment demands for old debts, verify the completion of the statute of limitations through the creditor change inquiry system.

◆ If a lending company transfers loan claims to another lending company, the outstanding loan balance and interest must be repaid to the lending company that acquired the loan claims.

◆ If normal loan repayment is difficult, learn about debt adjustment programs = If normal loan repayment is difficult, consider using debt adjustment programs that support economic recovery through repayment deferral or debt reduction. If you have no repayment ability, you may apply for personal rehabilitation or bankruptcy/discharge. For debt adjustment, contact the Korea Inclusive Finance Agency's Integrated Support Center for Low-Income Finance; for personal rehabilitation or bankruptcy, contact the Korea Legal Aid Corporation.

◆ Actively report illegal debt collection = If you experience illegal debt collection, actively report it to the Financial Supervisory Service or investigative agencies. Illegal collection includes debt collection without revealing identity, demanding repayment from family members or third parties, threats, inducing fear or anxiety, repeated calls or visits to residence, and calls or visits during nighttime hours (9 PM to 8 AM).

Since January 28, a system has been established to provide free support from debtor representatives and litigation lawyers (affiliated with the Legal Aid Corporation) for victims (or potential victims) of illegal private financing.