20·30 Credit Red Light On... Jeonse Loan Approaching '100 Trillion'

Rising Interest Rate Burden... Increased Interest Burden Expected for Youth
BOK "Credit Risk Likely to Increase Mainly for Vulnerable Borrowers"

It has been revealed that people in their 20s and 30s have borrowed nearly 100 trillion won from banks to prepare funds for jeonse deposits.
[Image source=Yonhap News]

[Asia Economy Reporter Han Seung-gon] It has been revealed that the amount of money borrowed from banks by people in their 20s and 30s to prepare for jeonse deposits is approaching 100 trillion won. As interest rates rise, borrowers' interest burdens may increase, raising concerns about growing credit risks, especially among vulnerable borrowers.

According to the 'Status of Jeonse Deposit Loans in the Banking Sector' received by Jin Sun-mi, a member of the National Assembly's Planning and Finance Committee from the Financial Supervisory Service, as of the end of April, the outstanding balance of jeonse loans borrowed by people in their 20s and 30s from banks was 96.3672 trillion won, an increase of 2.1915 trillion won (2.3%) compared to the end of last year.

The outstanding balance of bank jeonse loans for the youth increased annually from 54.7381 trillion won at the end of 2019 to 76.1787 trillion won at the end of 2020, and 94.1757 trillion won in 2021. As jeonse loans for those in their 20s and 30s increased, their share among all jeonse loan borrowers also rose.

The problem lies in the interest rates. Since most jeonse loans are variable-rate loans, an increase in interest rates inevitably leads to a higher interest burden. The COFIX (Cost of Funds Index), which serves as the benchmark interest rate for jeonse loans, stood at 2.38% (based on new contracts) as of June, rising 1.46 percentage points over the past year. With the Bank of Korea continuing its policy of raising the base interest rate, the interest rates on jeonse loans linked to COFIX are also likely to increase.

Amid expectations that the interest burden on young borrowers will increase due to rising interest rates, the Bank of Korea previously stated in March that the potential risk of default is relatively high among young people, self-employed individuals, and non-bank loans, and that preparations should be made for interest rate hikes and the end of financial support.

An information notice regarding jeonse loan in front of a bank in Seoul on the afternoon of the 15th. [Image source=Yonhap News]

According to the 'Financial Stability Situation' report released by the Bank of Korea, the proportion of vulnerable borrowers was 6.0% based on the total number of borrowers at the end of last year, and 5.0% based on the outstanding loan balance. Vulnerable borrowers refer to those who have borrowed from three or more financial institutions ('multiple debtors') and are either low-income (bottom 30% income) or have low credit (credit score of 664 or below).

Although the overall proportion of vulnerable borrowers has decreased, among young people in their 20s and 30s, 6.6% of all borrowers were classified as vulnerable borrowers, exceeding the average for other age groups (5.8%).

The Bank of Korea's report diagnosed, "If domestic and external conditions worsen during the normalization of accommodative financial conditions, the repayment ability of vulnerable borrowers may decline, and credit risks may increase, especially among young borrowers and self-employed vulnerable borrowers who have significantly increased their loans."

The government is preparing measures related to the interest burden on jeonse loan borrowers. President Yoon Seok-youl expressed concern at last month's Emergency Economic and Livelihood Meeting, stating, "Although the government announced measures to stabilize the rental market in June, the burden of repaying jeonse loans has increased due to rising interest rates, and the shift to monthly rent is increasing, causing the housing cost burden for non-homeowners to grow day by day." As a countermeasure, he announced that the interest rates on the Support Jeonse Deposit Loans will be frozen until the end of the year and that the loan limits for young newlyweds will be expanded.