[Practical Finance] In the High-Interest Era, Increase Principal and Interest Burden Before Debt Piles Up

Shinbokwi Adjusts Debt Based on Delinquency Period and Borrower Situation
Vulnerable Borrowers Receive New Start Fund, Normal Borrowers Get Low-Interest Refinancing
Careful Review Needed for Regional Credit Guarantee Foundation Central Association Special Guarantees

[Asia Economy Reporters Eunju Lee and Seungseop Song] Concerns are growing over the deterioration of financially vulnerable groups due to the ‘three highs’ phenomenon: high inflation, high interest rates, and high exchange rates. As prices and exchange rates soar, real income decreases, and with rising interest rates, the principal and interest repayment burden on vulnerable borrowers is increasing. Experts advise that it is essential to appropriately utilize policy financing, debt adjustment programs, and support products offered by the private sector to overcome the crisis.

Immediate Suspension of Debt Collection upon Application for Rapid Debt Adjustment at the Credit Counseling and Recovery Service

If repaying debt is difficult, reducing the debt amount is most important. The Credit Counseling and Recovery Service offers personal debt adjustment depending on the borrower’s situation. The ‘Rapid Debt Adjustment’ program is designed to minimize credit damage and provide assistance when temporary repayment difficulties arise. It is available even if payments are currently on schedule but delinquency is expected or if the delinquency period is 30 days or less. However, the total debt must be 1.5 billion KRW or less, and newly incurred debt within six months must not exceed 30% of the total debt.

Once the rapid debt adjustment is applied for, debt collection against the borrower and guarantor is immediately suspended from the next day. If a majority of the creditors (by debt amount) agree, overdue interest is waived. The repayment period can be extended up to a maximum of 10 years. The adjusted interest rate is based on the contracted interest rate, with a maximum interest rate of 15% per annum (10% for credit cards), so there is a possibility of interest rate reduction. Since short-term delinquency information is not concentrated, it is advantageous for credit recovery. The simple paperwork and low application fee (50,000 KRW) are also benefits. Especially, it allows prioritizing repayment of accounts with higher interest rates individually, which can reduce monthly repayment amounts and interest burdens. However, rapid debt adjustment applies the ‘equal principal and interest repayment method.’ Extending the repayment period increases the initial interest burden, so this should be noted. Unlike other programs, if repayment is not made on the scheduled date even after the procedure is completed, short-term delinquency information will be registered.

Benefits Vary by Delinquency Period... Check Your Debt Thoroughly

If short-term delinquency of 30 to 89 days occurs due to living expenses burden, interest rate debt adjustment (pre-workout) is possible. This can help avoid registration as a financial debt defaulter. The adjusted interest rate is reduced by 30-70% of the contracted interest rate. The maximum interest rate is 8% per annum, and the minimum is 3.25%. If the contracted interest rate is below 3.25%, it remains unchanged.

Borrowers with delinquency of three months or more can undergo the personal workout procedure. If they have made faithful repayments for two years or more, public record information on credit can be deleted early, which is advantageous for credit recovery. Upon confirmation, interest is waived. Principal can be reduced by up to 70% depending on whether it is amortized or not, and up to 90% for socially vulnerable groups (basic livelihood security recipients and persons with disabilities). Since some debts may be difficult to verify through credit inquiries, it is important to check your debts as thoroughly as possible using materials such as collection letters to avoid disadvantages.

Youth Special Program... Repayment Deferral Benefits Available Within 3 Years

Youth borrowers can also use the ‘Rapid Debt Adjustment Youth Special Program’ implemented for one year. Eligible borrowers are those aged 34 or younger whose financial institution debts have delinquency periods of 30 days or less or whose personal credit scores are in the bottom 20% (744 points by NICE, 700 points by KCB). Support includes a 30-50% reduction in existing loan interest rates depending on the debt burden. Principal reduction is not possible. The repayment period can be extended up to 10 years, or repayment deferral benefits can be received within three years. The interest rate during deferral is 3.25% per annum.

Delinquent Self-Employed Can Receive Interest Reduction through the New Start Fund

Self-employed individuals can look forward to support from the New Start Fund, which will be implemented next month. The New Start Fund is policy financing that adjusts debts for self-employed persons affected by the COVID-19 pandemic. Eligible individuals include those who have received loss compensation or small business disaster relief funds, those who have received maturity extension or repayment deferral measures on business loans due to COVID-19 damage, or those who can objectively prove other COVID-19 related damages. Benefits vary depending on whether the borrower is a bad debtor with delinquency of 90 days or more or a borrower at risk of default with less delinquency. The adjustment limit is up to 1.5 billion KRW in total, and bad debtors can receive principal adjustments of 60-80% of net debt (up to 90% for vulnerable borrowers). Borrowers at risk of default can convert to long-term, low-interest installment loans.

Normal Borrowers Can Also Access ‘Low-Interest Refinancing Loans’

Normal borrowers who do not fall under bad debtors or those at risk of default but are self-employed or small business owners affected by COVID-19 can apply for the Financial Services Commission’s low-interest refinancing program. Starting from the 30th, the Financial Services Commission will implement an 8.5 trillion KRW refinancing loan program that converts high-interest business loans of 7% or more.

Among borrowers with high-interest loans, those who have received disaster relief funds or have had maturity extensions or repayment deferrals from financial institutions can apply. However, they must currently be conducting normal business activities. That is, vulnerable borrowers who have closed their businesses, have tax arrears, or are delinquent with financial institutions should apply for the New Start Fund, while others can save on interest through the low-interest refinancing program.

Individual business owners can refinance multiple high-interest loans up to 50 million KRW, and small corporate businesses up to 100 million KRW. Interest rates can be lowered to a maximum of 6.5%. However, the applicable interest rate for each borrower must be reviewed by each bank. By accessing the ‘Online Refinancing Guidance System’ on the Credit Guarantee Fund website, which has been open since the 26th, applicants can check detailed information about the program, application methods, and schedules. After reviewing the information, applications for refinancing can be made through the app or face-to-face counters of the bank where the new loan will be taken.

Credit Guarantee Foundation ‘Hope Plus Special Guarantee’

Small business owners facing immediate cash shortages should thoroughly explore programs such as the special guarantee offered by regional Credit Guarantee Foundations. The Credit Guarantee Foundation is a non-profit special corporation that guarantees debts for small business owners with weak physical collateral in local areas, helping them secure funds smoothly from financial institutions and stabilize management. Currently, there are 17 regional offices nationwide, organized by metropolitan governments.

Using the Credit Guarantee Foundation’s ‘Hope Plus Special Guarantee’ program allows small business owners to receive loans at ultra-low interest rates. This program supports loans up to 10 million KRW at ultra-low interest rates in the 1% range for small business owners with medium to low credit. Since July, ‘COVID-19 loss compensation recipients’ have been added to the support target, and the guarantee limit has increased to 20 million KRW. The regional Credit Guarantee Foundation immediately provides the guarantee on behalf of the borrower.

Small business owners who have registered their business and received the ‘Small Business Quarantine Support Fund’ or ‘Small Business Loss Compensation Fund’ should check their credit scores. According to NICE evaluation standards, this applies to medium-credit small enterprises and small business owners with personal credit scores between 745 and 919, and borrowers with personal credit scores of 744 or below who have used the Small Enterprise and Market Service (SEMAS) Hope Loan. However, those who have delinquent loans or tax arrears are not eligible for benefits.