[Practical Finance] Long Fixed-Rate Grace Period... Sweet Tips for Interest Reduction During Rising Rates

Consider Factors Like Early Repayment Fees When Refinancing
If Credit Score and Salary Increased, Exercise 'Interest Rate Reduction Request' Rights

[Asia Economy Reporter Song Seung-seop] What are some "sweet tips" to save even a penny on interest costs during a period of rising interest rates, from mortgage loans to personal loans? Experts fundamentally emphasize a "cautious attitude." Borrowers aiming to increase investment leverage are advised to refrain from planning new loans, and if a loan is absolutely necessary, they recommend extending the grace period. They also advise that now is the time to actively pursue fixed-rate products for interest cost reduction.

Professor Kim Dae-jong of the Department of Business Administration at Sejong University said, "The U.S. has pumped out a huge amount of dollars, and interest rates inevitably continue to rise," adding, "Even if it is somewhat expensive, if the loan period is over 2 to 3 years, it is necessary to take a fixed interest rate." He warned, "Delinquency and credit score decline before taking out a loan are much more fatal at the time of interest rate hikes, so caution is required."

There were also voices advising against the behavior of trying to take out a loan with the mindset of catching the "last train." Oh Jung-geun, chairman of the Korea Financial ICT Convergence Society, explained, "Rising interest rates mean a decline in asset prices," and added, "Since the principal and interest burden increases, it is important to keep loans as low as possible and, if taken, to minimize variable interest rates." If a loan has already been taken, he added, "It is important to refinance, so you should look for products and platforms."

However, even when refinancing, it is advised to avoid simply moving to the cheapest fixed interest rate product and to consider other factors. The representative example is the prepayment penalty. The prepayment penalty is a kind of cancellation fee imposed on borrowers who repay the loan before maturity. It varies greatly depending on the type of loan, bank, and product characteristics. If handled carelessly, you may have to pay a fee larger than the reduced interest amount. The prepayment penalty is charged based on the remaining period until maturity and the loan balance, typically around 1% of the loan amount.

Lowering this fee makes the actual benefit greater even when switching to the same fixed-rate product. First, you need to consider the loan term. Since the prepayment penalty disappears after 3 years, it may be advantageous to maintain a variable interest rate temporarily depending on the situation. In the case of one-year personal loans, many do not charge a prepayment penalty 1 to 3 months before maturity. For mortgage loans, switching to a fixed rate within the same bank exempts the prepayment penalty.

Check Policy Financial Products in Advance and Actively Use the 'Right to Request Interest Rate Reduction'

There is also a way to use policy refinancing products. According to the Korea Inclusive Finance Agency, for the high-interest refinancing fund called "Haetsal Loan 17," if you repay steadily for more than a year without delinquency, interest decreases rapidly. Although the initial interest rate is 17.9%, if you repay faithfully, you can get an interest reduction effect of 2.5 percentage points annually for 1 to 3-year products. This is why low-credit borrowers should check in advance whether they qualify for policy financial products.

Besides refinancing products, the habit of checking and actively using government inclusive financial products in advance helps with interest cost reduction. Nam Yi-hyun, director of the Korea Inclusive Finance Agency, pointed out, "The easier it is to get a loan, the harder it is to repay," and added, "Cash services like card loans have high interest rates and negatively affect credit scores."

The "Right to Request Interest Rate Reduction" is also a representative means of saving interest. This right allows individuals and companies who have taken out loans to request banks to reduce interest if certain conditions improve compared to the time of the loan agreement. This applies when credit rating improves or, in the case of companies, financial status improves. For individuals, employment, promotion, salary increase, and asset increase also qualify.

If you plan to settle loans altogether, it is better to prioritize debts. Generally, debts with earlier maturity and smaller amounts should be repaid first. By industry, it is usually advantageous to repay in the order of secondary financial institutions, card loans, commercial bank personal loans, and mortgage loans. Professor Sung Tae-yoon of Yonsei University's Department of Economics suggested, "Loans should be settled in order with priorities rather than indiscriminately," and proposed, "Start by settling loans borrowed for asset investment."