[Self-Employed on the Brink] Loan Interest Rates Soar... Interest Burden Increases by 3 Trillion Won in Four Months

Self-Employed Face 5.8 Trillion KRW Increase in Interest Burden with 1% Rise in Loan Rates
Expected Interest Burden Grows Steadily with Rate Fluctuations
Average Loan Rate at 5 Major Banks Jumps from 2.78% to 3.37%
Government's Delayed Small Business Measures... "1% Ultra-Low Interest Loans"

[Sejong=Asia Economy Reporters Son Seon-hee and Song Seung-seop] As loan interest rates begin to rise in earnest, it has been revealed that self-employed individuals have shouldered nearly 3 trillion won in additional interest in the second half of this year. With the Bank of Korea’s base rate hike scheduled for the 25th, the upward trend in loan interest rates is inevitable, and the interest burden on individual business owners is expected to increase further. There are warnings that small and medium-sized business owners, whose basic financial strength is already depleted due to tightened loan regulations and restricted cash flow, could collapse rapidly as interest rates soar.

According to data submitted by the Bank of Korea to Yoon Doo-hyun, a member of the National Assembly’s Political Affairs Committee from the People Power Party, as of the first half of this year, a 1 percentage point increase in loan interest rates is estimated to raise interest burdens by 5.8 trillion won. If rates rise by 0.50 percentage points, the increase in interest burden is estimated at 2.9 trillion won, and a 0.25 percentage point rise would add 1.5 trillion won. The data was calculated by identifying borrowers with personal business loans as self-employed individuals using the Bank of Korea’s household debt database. The total loan amount held by these self-employed individuals, combining household and business loans, was estimated at approximately 858.4 trillion won in the first half of the year.

The projected increase in interest burden due to rate changes is on an upward trend. When measured in the third quarter of last year, a 1 percentage point hike in interest rates increased the interest burden by about 5.2 trillion won. However, as market interest rates rose this year, the figure expanded to 5.6 trillion won in the first quarter and increased by another 200 billion won in the second quarter compared to the previous quarter.

Top 5 Banks’ Average Interest Rate Up 0.59 Percentage Points in Four Months

This is analyzed to be because self-employed individuals, who were hit hard by COVID-19, took on additional debt to survive despite the start of the interest rate hike period. In particular, many of them chose variable-rate loans. According to the Bank of Korea, the proportion of variable-rate loans among self-employed individuals is estimated at about 67.9%. Although this is lower than the 74.9% variable-rate loan ratio for household loans, considering that the variable-rate loan proportions by industry and sector are not precisely reflected, many interpret that the actual impact of interest rate hikes is even greater.

The problem is that loan interest rates for self-employed individuals are expected to continue rising. The average interest rate on personal business credit loans at the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 2.78% in the first half of the year. However, last month, the average interest rate rose by 0.59 percentage points to 3.37%. Assuming similar growth rates in other sectors, self-employed individuals would have to pay nearly 3 trillion won in additional interest in just four months.

Meanwhile, the government has belatedly announced support measures for small business owners. The government revealed a livelihood support plan totaling more than 12.7 trillion won, including loans of up to 20 million won at an ultra-low interest rate of 1% for small business owners not covered by loss compensation. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated at the Emergency Economic Central Countermeasures Headquarters meeting held that day, “For sectors not eligible for loss compensation but subject to personnel and facility usage restrictions, we will newly supply 2 trillion won in ‘Special Recovery Loans’ with a limit of 20 million won at the lowest interest rate ever of 1.0%.”