Soaring Interest Rates... 'Screams' in the Era of 7% Credit Line Rates

[Asia Economy Reporter Yoo Je-hoon] #Seoul metropolitan area office worker Kim Young-ae (51, female) was recently surprised by a text message she received from her bank. She had created a negative balance account (overdraft) about two years ago to cover living expenses during the COVID-19 social distancing period, and was notified that the interest rate on her overdraft had risen to 7.21%. Kim said, "When I started, the interest rate was in the 3% range, and I thought it was beneficial to have it available since I wouldn't use a large amount," adding, "Rather than paying 200,000 to 300,000 won in interest each month, I thought it better to break my savings and repay it, so I did."

The interest rates on 'credit limit loans (overdrafts)' at commercial banks have surpassed 7% and are approaching the 8% range. As the interest rates on overdrafts, also known as quick cash sources for ordinary people, have surged like this, borrowers are struggling, with some repaying their loans earlier than planned.

According to the financial sector on the 28th, the new loan interest rates for overdrafts at the five major domestic commercial banks (KB Kookmin, Shinhan, Woori, Hana, NH Nonghyup) as of the 25th reached 6.58% to 7.98% (based on 6-month financial bonds). By bank, KB Kookmin Bank's rates for grade 1 borrowers range from 6.58% to 7.98%, Shinhan Bank from 6.87% to 7.77%, Woori Bank from 6.67% to 7.67%, Hana Bank from 6.72% to 7.32%, and NH Nonghyup Bank from 7.43% to 7.83%. Considering that the average overdraft interest rate at the four major banks was only 4.26% at the end of last year (according to the Korea Federation of Banks), this represents a steep increase.

The cause of this sharp rise in overdraft interest rates is attributed to the Bank of Korea's base rate hikes and the resulting increase in bond yields. The interest rate on 6-month AAA-rated bank bonds, which serve as the benchmark for overdraft rates, was as low as 1.591% at the beginning of the year, but due to the Bank of Korea's continuous base rate hikes and other factors, it rose to 4.681% this month. The 1-year bond yield also surged more than 3 percentage points during the same period, from 1.719% to 4.898%.

As overdraft interest rates soar, borrowers are moving to repay their loan amounts. According to the Financial Supervisory Service, as of the end of August, the overdraft balance at the five major banks was 45.0199 trillion won, up 8.3% compared to the end of the previous year, while the number of accounts decreased by about 3.3% to 3.007 million. A financial sector official said, "Since the Bank of Korea has forecast the upper limit of the final interest rate to be around 3.50% to 3.75%, a general rise in interest rates is inevitable," adding, "Borrowers are also trying to repay their loans as much as possible and switch to cheaper loan products such as insurance policy loans."