If Pushed Out of the System, Average Interest Rate is 46% per Year... Rampant Illegal Private Loans

Illegal Business Cards and Flyers of Loan Companies. Photo by Junyoung Jeong

[Asia Economy Reporter Song Seung-seop] It has been revealed that the average interest rate of unregistered illegal private loan companies not registered with the government is approaching 50% per annum. This far exceeds the legal maximum interest rate of 20%, highlighting that the burden on financially vulnerable groups, who have been pushed out of the formal financial sector, remains enormous.

According to the "Illegal Private Finance Survey Report" submitted by the Financial Supervisory Service to Song Jae-ho, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, the average annual interest rate for borrowers using unregistered illegal private loan companies was found to be 46.4%.

The report was created based on interviews conducted by the Financial Supervisory Service from November last year to January this year with over 10,000 adults aged 20 and older nationwide.

The interest rates reported by respondents who said they used unregistered or private loans ranged from a minimum of 12% per annum to a maximum of 3300% per annum. However, the Financial Supervisory Service stated that it is unclear whether the 3300% interest rate was actually applied. The median interest rate reported in the survey was 30.0%.

For registered lending companies, the average annual interest rate was 22.9% (median 24.0%). The interest rates reported by respondents ranged from a minimum of 2.0% to a maximum of 44.6%. At the time of the survey, the legal maximum interest rate was 24% per annum, so some respondents indicated they were charged interest rates exceeding this limit.

12.6% of respondents reported having used lending or unregistered/private loans at least once in their lifetime. Among them, 7.1% used only registered lending companies, while 5.4% used unregistered private loans. Based on population estimates, it is estimated that approximately 2.19 million people in the country have experienced illegal private financing.

Respondents who took out unregistered private loans borrowed a total of 7.83 billion KRW, with 2.05 billion KRW still outstanding. Applying population estimates, it is estimated that illegal funds amounting to 31.8 trillion KRW have been circulated in the unregistered private loan market.

In March, the government revised the Enforcement Decree of the Loan Business Act, lowering the legal maximum interest rate from 24% to 20% per annum. Although the reduced maximum interest rate has been applied since July, there are concerns that illegal private financing, which charges exorbitant interest, is still rampant. Especially recently, as financial authorities have been implementing strong total household loan regulations, there are worries that the damage to financially vulnerable groups being pushed into the illegal private loan market may increase.

Assemblyman Song Jae-ho emphasized, “There is a need to more strongly improve the current interest rate restriction system to prevent financially vulnerable groups from bearing indiscriminate interest burdens.”