[Loan Cliff for the Common People] Maximum Interest Rate to Decrease from Next Month... Will 320,000 Become 'Financial Refugees'?

Top 10 Loan Companies See Borrowers and New Loans Halved in Two Years

[Asia Economy reporters Kwangho Lee and Seungseop Song] Concerns are rising that about 320,000 people could face a 'loan cliff' as the statutory maximum interest rate is lowered from 24% to 20% per annum starting next month on the 7th. Among the 2.39 million people using loan products with interest rates exceeding 20% per annum, 316,000 are likely to be unable to extend their loans or be rejected, potentially becoming 'financial refugees.' In particular, even lending companies, the last bastion of the formal financial sector, are expected to either give up their business or tighten loan screening, leading to a surge of low- to medium-credit borrowers being pushed into illegal private loans.

According to the 'Large Lending Companies Survey' submitted by the Financial Supervisory Service to the office of Yoon Chang-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, as of the end of last year, the top 10 lending companies had 720,000 borrowers and new loans amounting to 1.3088 trillion KRW, which is about half compared to the end of 2018 (1.34 million borrowers, 2.6119 trillion KRW). Compared to the end of 2019 (980,000 borrowers, 1.6539 trillion KRW), the numbers decreased by 260,000 borrowers and 345.1 billion KRW respectively.

This is the result of businesses giving up or tightening loans due to deteriorating profitability caused by the reduction of the statutory maximum interest rate. In fact, Sanwa Daebu, ranked second in the lending industry, Taegang Daebu ranked fifth, and U& I Daebu ranked eighth have stopped issuing new loans and are only conducting collection operations. Leadcorp, the third-largest lending company, is preparing to leap into a formal financial company by acquiring a capital company.

Concerns are also being raised that the reduction of the statutory maximum interest rate could shake the secondary financial sector, including savings banks, card companies, and capital companies. Savings banks must apply the reduced interest rate retroactively to loans handled since 2018 according to the 'Basic Terms and Conditions for Credit Transactions.' Although card and capital companies are not obligated to apply the reduction retroactively, they are doing so for existing loans under the recommendation of financial authorities.

A financial industry insider said, "The financial market could experience turmoil after the 7th of next month," adding, "At a 10% annual rate standard, the interest rate gap with the primary financial sector almost disappears, so the secondary financial sector may effectively stop operations targeting low-credit borrowers." He continued, "Even before the statutory maximum interest rate reduction is implemented, the political sphere has already begun discussions on further reductions," pointing out, "More low-credit borrowers will be pushed into illegal private loans."

Assemblyman Yoon said, "If the price of money, that is, interest rates, is rapidly lowered, suppliers (financial companies) will have no choice but to stop selling the relevant loan products," advising, "We must not ignore recent precedents where government price interventions (rapid minimum wage increases) resulted in negative effects (job losses)." He added, "Although financial authorities are expanding mid-interest loans and strengthening policy financial products such as Sunshine Loans, there are limits," urging, "More practical supplementary measures need to be prepared."