The Principle of Immediate Repayment Upon Closing the Account: The 'Loan Trap' [How Is Your Dream Doing?]

Money Trap... Unable to Even Close Business

Small Business Loans Tie Hands
Sales Halved... Repayment Also Difficult

[Asia Economy Reporter Seungjin Lee] "I shouldn't have taken out a loan and should have closed the business without regrets. I blame myself so much."

Kang Chan-il (alias, 60 years old), who has operated a small foundry factory in Seoul for 15 years, is struggling with the decision to close his business. He explains that the loan he took out last year to somehow endure the situation, where sales were halved due to the impact of COVID-19, is now holding him back. This is because of the 'principled' condition that requires a lump-sum repayment of the loan if the business closes.

Low-interest loans implemented by the government and financial sector last year in response to COVID-19 are turning into boomerangs. A representative example is the small business loans conducted by the Ministry of SMEs and Startups and the Small Enterprise and Market Service, with an interest rate of 1.5% to 2% per annum and a maximum limit of 20 million KRW. Many small business owners received loan support to the extent that the loans were fully subscribed within a day.

The problem is that the loan support condition targets 'business owners operating a business place.' If the business closes, this basic requirement is not met, and there may be pressure for lump-sum repayment. Kang said, "I didn't expect COVID-19 to last this long, so I used the loan for employee salaries and rent," adding, "Now, I am in a situation where I cannot endure any longer."

Cases like Kang's are occurring nationwide. On online self-employed communities, small business owners complain daily about the lump-sum repayment of loans. One restaurant owner said, "Because of the repayment conditions, I had no choice but to add a shopping mall to my business type and move the address to my home," explaining, "The actual restaurant is closed, and only the business registration certificate is maintained."

The government proposed expanding loan repayment deferrals as the number of small business owners suffering from lump-sum repayment increases, but the standards vary depending on commercial banks and loan products. With the prolonged COVID-19 pandemic, more small business owners are expected to close their businesses, making it difficult to extend benefits indefinitely.

Regarding this, a Financial Services Commission official explained, "Currently, most financial institutions allow the loan to be maintained until maturity if the interest payments have been made faithfully even if the business closes," adding, "However, if interest payments are overdue or in cases of disguised closure, the loan must be repaid in a lump sum in principle."

An official from a commercial bank advised, "Many self-employed people who closed their businesses without being aware of the terms related to lump-sum loan repayment receive repayment notices from institutions," and "Since most banks provide repayment deferral measures, it is important to consult with the lending institution first."