[Reporter’s Notebook] The Misguided Financial Logic of Presidential Candidates

Governor Lee Jae-myung: "There Should Be a Welfare Loan System Where Anyone Can Get Long-Term Loans"
Advocates for Basic Loan Rights Following the 10% Cap on Maximum Loan Interest Rates

[Asia Economy Reporter Park Sun-mi] "It is not natural to pay ultra-high interest rates just because income is low and there is no collateral. Our country only has welfare that is fully free and loan systems that require full repayment, with no middle ground. There should be a welfare loan system (basic loan right) where the state bears some losses from partial non-repayment (up to 10%) so that anyone can receive low-interest, long-term loans."

Lee Jae-myung, the leading presidential candidate from the ruling party and Governor of Gyeonggi Province, posted a Facebook message titled 'Basic Loan Right... We Must Transform Exploitative Low-Income Finance into Humane and Fair Finance' on the 12th, which is causing waves in the financial sector. The core idea is that the government should guarantee a certain level of credit risk so that any citizen, regardless of credit rating, can borrow a certain amount of funds at ultra-low interest rates and repay over a long period.

The argument is that most Koreans have the 'goodwill' to repay debts if they have the ability, so if the government limits losses from partial non-repayment to a maximum of 10% (interest rate capped at 10%) and takes responsibility, the losses incurred by the government could be much less than welfare expenditures.

Lee's argument overlooks the logic that credit evaluation of individuals and appropriate interest rate setting based on that can create a balance in the financial industry by enabling more people to take out loans.

The reason banks offer different interest rates based on creditworthiness is because the financial risk that the financial sector must bear by lending money is intertwined with the borrower's repayment obligations and responsibilities. No one borrows money with the intention of not repaying it from the start. However, if ultra-low interest rates and long-term loans are possible, inevitably, there will be people who cannot repay.

An increase in borrowers who cannot repay principal and interest leads to higher costs for the financial sector and causes side effects where increased financial risk imposes greater burdens on subsequent borrowers. This is why Lee's proposal is criticized as populism aimed at gaining votes from the lower-income class by ignoring financial logic.

Lee has consistently argued that the maximum loan interest rate should be capped at 10%. Although the financial sector, opposition parties, and even financial authorities opposed this, warning that people in urgent need of funds would have nowhere to borrow and illegal private loans would grow, he again brought up the basic loan right. Finance should not be viewed only from the perspectives of fiscal policy and welfare. We express concern over this representative example of armchair theorizing by a politician who approaches finance politically without understanding it.