[Exclusive] Surge in Debt Consolidation Loans from Private Lenders... The Swamp of 'Debt Recycling' Begins in the High-Interest Era

Loan Shark Loans for Repayment of Other Loans Increase 20% Year-on-Year
Debt for 'Debt Recycling' Rises... Education Loan Purpose Also Up 14%
Need for Debt Adjustment for Multiple Debtors in Era of Interest Rate Hikes and High Inflation

[Image source=Yonhap News]

[Asia Economy Reporters Song Hwajeong and Gu Chae-eun] It has been revealed that ‘debt rollover’ through loan companies has surged. As the burden of principal and interest repayment increases due to high interest rates, low-credit borrowers who urgently need cash are turning to loan companies with high interest burdens.

According to data on the ‘amount of refinancing loans among the top 20 loan companies by personal credit loan balance’ submitted by the Financial Supervisory Service to the office of Yoon Young-duk, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, the amount newly borrowed from loan companies in the first half of this year for the purpose of repaying other loans was 63.271 billion KRW, a 20% increase compared to one year ago (52.740 billion KRW).

Loans for educational expenses amounted to 3.745 billion KRW, increasing by 14.5% during the same period. Loans for living expenses, which account for the largest share of loan company loans, were 560.764 billion KRW, almost unchanged with a slight increase of 0.42% compared to the first half of last year (558.384 billion KRW). On the other hand, loans for housing funds from loan companies decreased by 9.3% to 9.775 billion KRW compared to one year ago, and other loans for business funds or goods purchases also decreased by 2.1% to 96.875 billion KRW.

Considering that the total loan amount based on new transactions of all loan companies increased by only 1.4%, loan company loans in the first half of this year were concentrated on refinancing loans and student loans.

[Image source=Yonhap News]

On the 29th, as the COVID-19 pandemic continues to persist, illegal loan business card-type flyers from private lenders are scattered across the Insadong street in Jongno-gu, Seoul. Photo by Moon Honam munonam@

This phenomenon is interpreted as low-credit borrowers who could not obtain loans from other financial sectors being pushed to loan companies due to the increased interest burden caused by rising interest rates. According to the Korea Development Institute (KDI), when the market interest rate rises by 1 percentage point, about 970,000 people are pushed into loan companies or non-institutional loans.

As refinancing loans through loan companies increase, the interest burden on low-credit borrowers has further increased. According to the Financial Supervisory Service, the average loan interest rate of loan companies as of the end of last year was 14.7%. With the Bank of Korea raising the base interest rate six times up to October this year, the average interest rate level is expected to be even higher. The funding cost of loan companies is currently formed at an annual rate of 9-12%.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, “This reflects the phenomenon of vulnerable borrowers with declining credit ratings shifting their sources of funds to secondary financial institutions or loan companies,” adding, “Since additional interest rate hikes may become necessary, it is important to manage so that the actual risk does not transfer to vulnerable borrowers.” Professor Sung especially emphasized, “To prevent high-interest refinancing loans, financial authorities need to guide those with low income and assets to be able to receive refinancing loans with favorable interest rates.”