[Asia Economy Reporter Jin-ho Kim] An analysis has emerged that rising loan interest rates will most severely undermine the financial soundness of low-income households, self-employed individuals, and young households.
The Hyundai Research Institute revealed this in its report titled "The Impact of Rising Loan Interest Rates on Household Financial Soundness," released on the 22nd. The institute expressed concern, stating, "Domestic household loans surpassed 1,756 trillion won as of the fourth quarter of last year, showing significant quantitative accumulation," and "With the recent strengthening trend of rising market interest rates, the risk of household debt default is increasing."
The institute assumed that loan interest rates could rise by 0.5 to 2 percentage points in the future, considering the current pace of interest rate increases and the loan interest rate levels during past rate hike periods.
Accordingly, they analyzed changes in interest costs and the Debt Service Ratio (DSR) under various interest rate rise scenarios to measure financial soundness. The report calculated DSR as the annual principal and interest repayment amount divided by annual disposable income, multiplied by 100.
The institute classified DSR thresholds for financial risk assessment as 'low DSR' for below 40% and 'high DSR' for 70% or above.
By income level, low-income households (bottom 30% in disposable income) were found to be the most financially vulnerable. If loan interest rates rise by 2 percentage points, the DSR of low-income households increased by about 3.8 percentage points, from 40.2% to 44.0%. In the same scenario, the DSR of high-income households (top 30% in disposable income) rose by only about 2.4 percentage points, from 29.0% to 31.4%.
By employment status, the repayment burden of self-employed households increased significantly, and their financial soundness deteriorated. If loan interest rates rise by 2 percentage points, the average annual interest cost for self-employed households increased from 4.33 million won to 6.43 million won, an increase of about 2.1 million won.
By age group, the increase in DSR was highest among young households (aged 39 and under). The DSR of young households rose by about 2.9 percentage points, from 35.2% to 38.1%, showing a larger increase compared to other age groups. This indicates that young households hold a disproportionately large amount of debt relative to their income.
The institute stated, "Domestic household loans have a high proportion of variable interest rates, and household incomes have not fully recovered from the impact of COVID-19," and recommended, "Policy efforts are needed to prevent the repayment burden on households from increasing due to rising loan interest rates."
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