[Self-Employed Financial Report] ③ Low-Interest Refinancing for Credit Loans up to 20 Million Won

Financial Services Commission Revamps Low-Interest Refinancing Program for Self-Employed
Business Loans Limited to 100 Million KRW for Individuals, 200 Million KRW for Corporations
'3-Year Grace Period - 7-Year Installment Repayment'

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] What government policy do self-employed business owners, burdened with debt, prioritize to reduce their loan repayment burden even by a small amount? According to the '2022 Guarantee Usage Small Business Financial Status Report' (survey of 3,101 small business operators) released by the Korea Credit Guarantee Fund on the 2nd, self-employed business owners most frequently chose 'principal and interest reduction' (34.6%). This was followed by 'low-interest refinancing loans' (28.7%) and 'conversion to long-term loans with long-term installment repayment' (18.5%).

The Financial Services Commission (FSC) is also responding to these demands by improving the low-interest refinancing policy for small business owners. For 'individual business loans,' only self-employed business owners affected by COVID-19 were eligible for refinancing, but starting from March, the eligibility will be expanded to all self-employed business owners, and the loan limit will be increased. 'Credit loans' will also be included in the refinancing target up to 20 million KRW. However, refinancing of credit loans will only be available to self-employed business owners affected by COVID-19 and will be applied from the second half of this year.

The low-interest refinancing program for self-employed and small business owners began in September last year. As of the end of January, about 7,300 high-interest business loans (about 270 billion KRW) with interest rates above 7% have been converted to low-interest loans with rates below 6.5%. An FSC official stated, "The average interest rate on existing loans for self-employed business owners using the low-interest refinancing program is about 12%," adding, "The refinancing has reduced the annual interest burden by more than 5 percentage points."

However, due to stringent application requirements, the number of applications was lower than expected. With the economic downturn, the FSC has expanded the eligibility for low-interest refinancing loans.

"Switch to cheaper interest rates and repay slowly"

In the 'individual business loan' category, the support target will be expanded to all individual business owners and small corporate businesses. An FSC official explained, "Until now, only individual business owners or small corporate businesses who received disaster relief funds or compensation for losses, or who had maturity extensions or repayment deferrals from financial institutions, were eligible," adding, "From March, anyone who is an individual business owner or a small corporate business can apply for low-interest refinancing."

However, the eligible loans remain business loans taken out before the end of May last year, as is currently the case. Loans renewed after June last year are also included in the refinancing target.

The refinancing loan limit will increase to 100 million KRW for individuals and 200 million KRW for corporations. The FSC official said, "Until now, the limits were 50 million KRW for individuals and 100 million KRW for corporations, but these have been doubled," adding, "Within the increased limit, additional refinancing is possible."

The repayment structure has also been changed to '3 years grace period - 7 years installment repayment' to reduce the monthly repayment burden on self-employed business owners. Originally, it was '2 years grace period - 3 years installment repayment,' but it has been extended for long-term operation. Based on a refinancing loan principal of 100 million KRW, previously, monthly repayments of 2.78 million KRW were required for 5 years, but going forward, monthly repayments of 1.19 million KRW over 10 years will suffice.

An FSC official stated, "The low-interest refinancing program fully exempts prepayment penalties, so borrowers who want to repay early can always repay the principal and interest," adding, "With the government's budget allocation this year, the refinancing scale has been expanded, and the application deadline has been extended by one year until the end of next year." As the government budget for refinancing loans increases from 680 billion KRW to 760 billion KRW, the supply scale has also expanded from the existing 8.5 trillion KRW to 9.5 trillion KRW.

Self-employed business owners' 'credit loans' will also be eligible for refinancing from the second half of this year. Household credit loans with a limit of 20 million KRW for self-employed business owners affected by COVID-19 will be included in the refinancing target. Household loans were previously excluded because their usage was unclear. However, the FSC considers that self-employed business owners took out high-interest household loans during the COVID-19 period to cover operating costs, so up to 20 million KRW of credit loans will be refinanced.

An FSC official explained, "Among credit loans, loans from secondary financial institutions including card loans are eligible for refinancing, but non-financial sector debts such as loans from private lenders are not included," adding, "The repayment structure will operate in the same way as existing individual business loans." Low-interest refinancing can be inquired about and applied for at commercial banks and the Korea Credit Guarantee Fund.

Delinquents of Microfinance also included in New Start Fund

The New Start Fund program, which reduces principal and interest on loans, will also expand its target. Borrowers who have been delinquent on loans for more than three months will have up to 80% of their loan principal forgiven. Borrowers at risk of default with delinquency periods of less than three months will receive interest rate adjustments and support for long-term installment repayment for up to 10 years depending on the delinquency period. Until now, only delinquent borrowers from banks, insurance companies, savings banks, and card companies were eligible, but through an agreement with the Microfinance Foundation, borrowers from this institution will also be able to use the New Start Fund.

The FSC's expansion of support targets appears to be a measure to improve the previously low performance of policy finance and to prevent risks. Jeong Eunae of the Small and Medium Business Research Institute warned, "Even small business owners with relatively favorable management conditions can become insolvent, so management and prevention are necessary," adding, "If interest rates rise by 1 percentage point, about 80,000 to 120,000 businesses will face critical situations, and even businesses with good management conditions may enter insolvency."