[Wondara's Small but Certain Finance] Rising 'Matong', Should You Open One Now?

Compare Interest Rates and Limits by Bank; Risk of 'Snowball Debt' Due to Compound Interest if Unable to Pay
Short-Term Loans More Advantageous Than Long-Term... Higher Limits Not Always Better
Loans Counted Even If 0 Won Used, May Restrict Borrowing Limits
Financial Sector Recently Reducing Limits and Raising Rates... Check for 'Fixed Interest Rate'

As the saying goes, "If the company atmosphere worsens, open the stock window," these days, when it is difficult to even join conversations without an interest in financial investment, we plan to deliver the basics of financial investment every weekend for those who are 'financial investment novices' and feel shy to ask questions. We will resolve the curiosities of Mr. Kim Jjomjjom, who wants to start 'Jjomjjomdari' (a new term meaning 'little by little' or 'small') financial investment, through 'Wondara's Small but Certain Financial Investment.'

[Asia Economy Reporter Wondara] #Mr. Kim Jjomjjom, an office worker who decided to join the late 'debt investment' craze, decided to first create a negative balance account (overdraft) after hearing that 'you only pay interest on what you borrow without lowering your credit score.' However, after hearing recent articles stating 'loan limits are decreasing and interest rates are rising,' he found himself in a dilemma.

▲How do I create a negative balance account?=It can be created both face-to-face and non-face-to-face. Although required documents may vary by bank, you generally need an ID card, two years of 'earned income withholding receipts,' and a certificate of employment. Business owners need an income amount certificate. In some non-face-to-face cases, after credit verification, you must enter your workplace name and annual income. Typical issuance conditions are being over 20 years old, employed for more than six months, and having a credit rating between 1 and 6.

▲Can I go to any bank?=The official name of the negative balance account is 'limit loan.' Its advantage is the convenience of withdrawing and repaying funds anytime within the agreed limit. However, you should compare loan interest rates and limits by bank. While you can check each bank’s loan interest rates on their websites, the Bankers Association Consumer Portal organizes this information for easy comparison.

You can compare which bank offers the lowest loan interest rate based on your credit rating. The final loan interest rate is determined according to preferential rates that meet certain conditions. Generally, it is adjusted based on whether you have a main bank account, savings product subscriptions, or high-credit occupations. Some banks offer preferential rates if you subscribe to specific products. Typical interest rates range from 2% to 4%.

▲Screenshot of the Consumer Portal of the Korea Federation of Banks

▲If I have a 10 million KRW negative balance account and haven't used a single won for a year, does that mean my loan is zero?=Even if you haven't used a single won from the limit, credit inquiries treat it as if you have borrowed 10 million KRW. It is considered an existing loan, which may reduce your future loan limit or cause other disadvantages. Therefore, it is better to create a negative balance account with a limit matching the amount you need rather than a large limit unconditionally.

▲Is the interest on a negative balance account cheap or expensive?=The interest rate on a negative balance account is about 0.5% to 2% higher than that of a regular unsecured loan. From the bank’s perspective, general loans generate interest margin on the entire loan amount, but negative balance accounts only earn interest on the amount used within the limit, so the rate is set higher.

A downside of the negative balance account is that interest on the used amount compounds ('compound interest'). If your limit is 10 million KRW, do not use it all; you must leave enough to cover the interest to avoid paying compound interest. Remember that long-term delinquency can cause debt to snowball. For this reason, if you plan to borrow long-term, it is better to use a cheaper general unsecured loan and use the negative balance account only when you can quickly repay the used amount. The fact that interest is charged daily and there is no early repayment fee makes the negative balance account advantageous for short-term loans.

▲If my salary increases, I can use the 'right to request interest rate reduction'=It is commonly believed that once a loan product is taken out, the interest rate cannot be lowered, but if you prove an increase in assets or salary, you can request a reduction in the loan interest rate. For 'mortgage loans' or 'jeonse deposit loans,' personal credit rating has less impact on the interest rate, but for negative balance accounts, where personal credit rating has a significant impact, the right to request an interest rate reduction is a representative applicable product. However, since multiple factors affect personal credit ratings, it is not guaranteed to be accepted unconditionally, so you should consult with the bank where you opened the negative balance account and check the eligibility requirements.

▲Trend of decreasing negative balance limits and rising interest rates=Recently, concerned about the rise in household loans due to the debt investment craze, financial authorities have advised banks to lower their loan targets. Accordingly, banks have been lowering loan limits from about 150 million KRW to around 50 million KRW. Even foreign banks, which had relatively high loan limits, and banks that have not lowered limits are raising interest rates. Because of this, there is analysis that 'young investors' and 'debt investment groups' rushed to open negative balance accounts before limits decreased and interest rates rose, contrary to the financial authorities' intentions. The usage limit is maintained for the agreed period, but if you chose a variable interest rate when opening the negative balance account, the interest rate may gradually increase. Therefore, in a rising interest rate trend, it is advantageous to check banks with low interest rates and choose 'fixed interest rate' when opening a negative balance account.