Is It Illegal to Take Out Multiple Loans in a Day? [Song Seungseop's Financial Light]

Finance is difficult. It is filled with confusing terms and complex backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge must be the foundation. Therefore, Asia Economy selects one financial term each week and explains it in very simple language. Even if you know nothing about finance, we light the 'fire' of financial understanding with 'light' stories that you can immediately grasp.

[Asia Economy Reporter Song Seungseop] What happens if you visit several banks in one day to get loans? You might think it’s because you need that much money, but there is a high possibility of it being ‘illegal.’ Depending on whether there is intent, you could face imprisonment. There are actual cases like this. Why do such problems occur?

A Mr. A (51), who was an office worker, applied for a loan at B Savings Bank last year and borrowed 35 million won. It was a lump-sum repayment method with an interest rate of 15.6% over 60 months. On the same day, Mr. A also took out loans of 30 million won from C Savings Bank and 10.4 million won from D Savings Bank. Mr. A was later sentenced to six months in prison on charges of ‘fraud.’

This act of taking multiple loans within a short time frame is called ‘simultaneous loans’ or ‘time-lag loans.’ It is a kind of trick loan mainly used when the amount needed exceeds the borrower’s loan limit. For example, a person with a limit of 20 million won visits three banks in one day to borrow 50 million won.

Simultaneous loans were possible due to system loopholes. Suppose you borrow money from a financial institution today. This information does not immediately spread to all financial sectors. Typically, it takes up to five business days for loan information to be registered and fully received by other financial institutions. Even if the financial institution uploads all loan details by the evening of the same day, it is difficult to share the information in real time. Loan brokers have exploited this fact to recommend simultaneous loan methods to their clients.

If simultaneous loans become rampant, the financial order collapses

[Image source=Yonhap News]

Why are simultaneous loans inappropriate? Because they disrupt the order of financial and credit information. Everyone should borrow money according to their income and credit level. If someone borrows recklessly beyond their capacity, the risk of default increases. From the bank’s perspective, vulnerabilities also increase. Statistics show that the default rate for simultaneous loans in the savings bank industry was 7% in 2015-2016, 1.7 percentage points higher than general loans.

Of course, nowadays, simultaneous loans have significantly decreased due to financial authorities’ post-management and private financial companies’ voluntary efforts. It is standard to check loans after three days, and if it is later discovered that a loan was taken from another institution, the loan is recalled or permanent transaction bans are imposed. Also, large financial companies have systems to share loan information quickly, so simultaneous loans practically do not occur.

However, Mr. A borrowed money multiple times from financial companies with loopholes. B Savings Bank was a place that checked for simultaneous loans when issuing unsecured loans. A staff member at B Savings Bank asked Mr. A if he had ongoing loans at other companies, but Mr. A answered ‘no.’ Mr. A’s loan broker also instructed him to answer ‘no’ if asked about simultaneous loans by financial institutions.

Mr. A and his lawyer argued that they only followed the loan broker’s instructions and did not know that applying for loans simultaneously at multiple financial institutions was illegal, so there was no criminal intent.

Judge Jeong Hanggeun, head of Criminal Division 1 at Ulsan District Court, who handled the case, stated, “The defendant was sentenced to a suspended prison term for obstruction of business in July 2019 and reoffended during the suspension period. Considering the large amount of damage and that the victim banks did not forgive him, severe punishment is inevitable,” explaining the sentencing rationale.