Increased Anxiety Among Real Demand Borrowers Due to Comprehensive Loan Regulation Strengthening
Forced to Turn to Private Loans Reluctantly
Illegal business card-type flyers from loan companies found in a traditional market in Seoul. (Photo by Jeong Jun-young)
[Asia Economy Reporter Kim Jin-ho] Office worker Park Jeong-ho (32, pseudonym) is facing great concerns ahead of his wedding in October. Most of his funds have been poured into securing a house amid skyrocketing prices, leaving insufficient funds for wedding expenses and other wedding-related costs. He tried to use his existing overdraft account for financing, but the main cause of the plan falling apart was the recent ‘loan regulation’ that significantly reduced the credit limit instead of extending the maturity. Having difficulty securing money, Mr. Kim ultimately plans to borrow wedding funds through peer-to-peer (P2P) lending.
According to the financial sector on the 29th, indiscriminate loan restrictions by financial authorities are rapidly spreading ‘anxiety’ among real demand borrowers. The tightening of household loans is expanding comprehensively from banks to savings banks, mutual finance, insurance, and card companies. Real demand borrowers who urgently need funds are now forced to turn to P2P finance and private lending.
Major commercial banks recently stopped loan products and also reduced credit limits when extending existing overdraft accounts. Previously, limits were only reduced if the account was opened but unused for a year, but under the government’s strengthened household loan management policy, a 10-20% limit reduction will now be applied even to existing loans. The situation is similar in the secondary financial sector.
In particular, for unsecured loans, almost all commercial banks have decided to drastically adjust limits to be ‘within annual salary.’ For borrowers with existing loans, it has become virtually impossible to secure additional funds.
Consumers’ anxiety is growing day by day due to the financial sector’s successive loan suspension measures. Due to stringent loan regulations, not only non-homeowners such as jeonse (long-term deposit lease) demanders but also young people, the so-called real demand borrowers, are facing a loan cliff. The impact is significant as loan regulations have been simultaneously strengthened not only in banks but also in secondary financial institutions such as savings banks and mutual finance.
Real demand borrowers in panic are now looking into P2P finance and private lending. Since all regulated financial institutions from banks to savings banks have blocked loans, they are reluctantly seeking alternatives. P2P and private lending are not subject to various government loan regulations such as the debt service ratio (DSR).
In fact, on real estate and wedding preparation communities, posts such as “The moving date is right around the corner, but jeonse loan is blocked and additional loans from savings banks or Saemaeul Geumgo (mutual savings banks) are difficult, so it’s hopeless” and “My financial plan is disrupted, so I am prioritizing P2P finance” can be easily found.
However, P2P companies and private lenders have significantly higher interest rates compared to first-tier financial institutions, placing a heavy burden on borrowers. The average interest rate for P2P mortgage loans is 7-10% per annum, and personal unsecured loan rates range from 5-20% per annum. For private lending, the average loan interest rate is about 17%.
Therefore, there are criticisms that the government’s indiscriminate loan regulations have forced real demand borrowers in urgent need of funds to pay several times higher interest. A financial sector official said, “There is a high risk that real demand borrowers will be collateral damage from uniform household debt measures,” adding, “Delicate policies are needed to precisely analyze real demand and speculative demand so that those who truly need loans are not driven to private finance.”
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