"Up to 38,000 Illegal Private Loan Borrowers After Maximum Interest Rate Reduction"

Korea Institute of Finance Analysis Report on Loan Users
Excluded from Loan Market Due to Low Credit Scores
Decrease in Loan Users Also Affected by Withdrawal from Loan Business

[Asia Economy Reporter Kwon Hyun-ji] An analysis has emerged that the number of borrowers driven to illegal private loans for one year after the statutory maximum interest rate was lowered in 2021 exceeds 30,000 at its peak.

The Korea Institute of Finance announced on the 4th in its report titled "Analysis of Changes in Borrowers Using Loans After the 2021 Maximum Interest Rate Reduction" that from the end of June 2021 to the end of June 2022, the number of people excluded from the loan market and who used illegal private loans was estimated to be between 18,000 and 38,000. The report estimated this based on the results excluding those borrowers who neither used loan services from private lenders nor from the first and second-tier financial institutions after the maximum interest rate was lowered in July 2021 (from 24% to 20% per annum), and who did not reduce their loan demand. These individuals wanted to use private loans but were rejected due to stricter loan screening and low credit scores following the interest rate reduction, thus entering the illegal private loan market.

This result is similar to the scale of illegal private loan inflow (38,000 people) following the 2018 maximum interest rate reduction (from 27.9% to 24% per annum) as shown in tracking surveys by the Financial Services Commission and the Financial Supervisory Service. The Financial Services Commission also announced in November 2020 that the increase in illegal private loan users due to the maximum interest rate reduction was 39,000.

In recent years, as the statutory maximum interest rate has been lowered by more than 5 percentage points, concerns have been raised that the number of private loan users would decrease and illegal private loan usage would increase. According to the Financial Supervisory Service's survey on private lending, the number of private loan users decreased from 1.23 million at the end of June 2021 to 1.064 million at the end of June 2022.

However, the report analyzed that the decrease in the number of private loan users after the 2021 maximum interest rate reduction was more due to the contraction of the private lending industry’s operations than the interest rate reduction itself. Sujin Lee, Senior Research Fellow at the Korea Institute of Finance, explained, "This reflects the trend of decreasing private loan users due to the suspension of new loans and closures by some large private lending companies that have continued since 2018." In fact, Apro Financial Private Loans (Rush & Cash), the top company in the private lending industry, completely stopped new loans in December last year, and about ten other companies, including Sanwa Private Loans (2019) and Joy Credit (2020), have also suspended lending.

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