[Indebted Self-Employed] "Borrowed from Eldest Daughter Instead of Bank... 4.6% Interest Rate Among Family"

Bank Business Loan Interest Rates Soar to 5-6%
If You Have a Financially Stable Family, Fixed Rate Loans Available at 4.6%
Start Repaying Principal First to Reduce Interest Even by a Penny
Survival Strategies for Self-Employed During Interest Rate Hikes

"To borrow money from family without gift tax issues, you just need to offer a fixed interest rate of 4.6%. It’s a method I never considered during the low-interest era... Now, it’s much lower than bank rates. If you have family with spare funds, it’s a lifesaver for sole proprietors."

Kim Dae-ho (66), who runs a small factory that applies waterproof coating to swimming goggles, urgently needed 100 million KRW in operating funds and visited a bank last month but left after just consulting about loans. "I kept hearing that interest rates were rising, but the business loan interest rate was as high as 6.7%. Forget about repaying the principal; just the interest alone is 560,000 KRW per month. During the COVID period, people didn’t go to swimming pools, so goggles didn’t sell well, and I struggled. Now that the factory is finally operating at pre-COVID levels, I need cash flow, but I wondered how I could handle this interest."

The solution came from his eldest daughter and youngest son who visited their parents during the holidays. Kim Eun-young (42), an office worker and the eldest daughter, said, "Coincidentally, I had some spare funds withdrawn from stocks, so my brother and I each lent 50 million KRW to our father. Lending money within the family is much cheaper than bank interest." In family-to-family monetary loan transactions like the Kim family’s, the legal maximum interest rate is 4.6%. Even between parents and children, if interest is not paid, gift tax issues may arise, so from the time the money was borrowed, they have been transferring 380,000 KRW in monthly interest to his bank account.

"In a small factory with five employees, even to pay salaries on time, we have to save every bit of interest. But with interest rates expected to rise further, I’m more worried. The more orders we get, the more funds we need, and we’ll have no choice but to go to the bank. When interest was 2-3%, this was a worry we didn’t have to face."

Rising Interest Rates More Frightening Than the Pandemic for Sole Proprietors

Those struggling with rising interest rates are not only the "young all-in" borrowers. Self-employed and sole proprietors who run businesses with bank loans feel the burden of interest even more acutely. Bang Hyun-jun (45), who operates five large bakeries in Gyeonggi Province, said, "With material costs rising and the minimum wage increasing again in two months, seeing interest rates soar makes me anxious about how we can survive."

Bang inherited the family business from his father and currently manages loans totaling about 3 billion KRW. He said, "Each time we open a new store, it costs tens of billions of KRW, and 80% of that is bank loans. We have over 200 employees and annual sales of about 16 billion KRW. Even during COVID, we were not greatly affected and maintained this scale, but now I realize that rising interest rates are scarier than the pandemic."

Until last year, loan interest rates at banks were in the mid-to-high 2% range, but they have now risen to the high 4% to low 5% range. Bank interest expenses have more than doubled from 7 million KRW to 15 million KRW per month. Bang said, "We had no choice but to raise product prices, and these days, rather than reinvesting, we are repaying principal as soon as money comes in. I’m trying to find loans with lower interest rates by visiting banks, but government-supported loans for small businesses mostly apply to manufacturing, and food service businesses like ours are often excluded, so it’s difficult."

[Image source=Yonhap News]

Personal Business Loans Decline for the First Time Since COVID-19 Due to Rising Interest Rates

Personal business loans, which had been steadily increasing since the COVID-19 outbreak, decreased for the first time last month as interest rates rose. Loans to sole proprietors at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) totaled approximately 314.8 trillion KRW as of the end of October, down about 460 billion KRW from the previous month. A representative from a commercial bank explained, "Sole proprietors are reducing new loans due to interest burdens, and as signs of an economic downturn are detected, banks have become more cautious about lending."

According to the Bank of Korea, the average loan interest rate for banks’ small and medium enterprises (including sole proprietors) rose from 2.88% in March last year to 4.87% in September this year. In October, the Bank of Korea implemented a big step (raising the base rate by 0.5 percentage points at once), and with the bond market freezing due to Legoland, the financial sector expects the current average loan interest rate for SMEs to have soared well above 5%.