[1mm Financial Talk] Why Only Interest Rates on Personal Loans Are Rising and Delinquency Rates Increasing

Authorities' Pressure to Cut Interest Rates Focuses on Mortgage and Jeonse Loans
Credit Loans Are an Exception... Delinquency Rates Also Rising
Refinancing Loans Is the Most Certain Way to Lower Interest Rates

[Image source=Yonhap News]

As interest rates on unsecured loans continue to rise, delinquency rates are also increasing accordingly. While mortgage loan interest rates among household loans have dropped to the 3% range, unsecured loan interest rates have decreased at a slower pace, which is the main cause.

According to the Consumer Portal of the Korea Federation of Banks on the 26th, the average interest rate for new unsecured loans (excluding microfinance) from eight banks (the five major banks and three internet banks) actually increased from 6.06% in February to 6.16% in March.

During the same period, some banks saw a decrease in the proportion of loans in the lowest interest rate bracket of '4% to less than 5%'. For example, Shinhan Bank's share dropped by 6.1 percentage points (from 26.5% to 20.4%), and NH Nonghyup Bank's share decreased by 4.6 percentage points (from 11.6% to 7%). Hana Bank (5.3% to 4%) and K Bank (25.2% to 24%) also saw declines.

In contrast, the average mortgage loan interest rate of the eight banks fell from 4.68% in February to 4.56% in March, with a large number of 3% mortgage loans emerging mainly from internet banks. A representative from a commercial bank said, "Financial authorities pressured banks to lower interest rates, so banks mainly reduced interest on mortgage and jeonse deposit loans," adding, "This policy effect did not apply to unsecured loans."

The delinquency rate on unsecured loans is much higher than that of mortgage loans for this reason. According to the Financial Supervisory Service's report on the "Status of KRW Loan Delinquency Rates at Domestic Banks as of the End of February," the delinquency rate for unsecured loans was 0.64%, higher than that of mortgage loans (0.2%) and small and medium-sized corporate loans (0.52%). The increase from the previous month was also 0.09 percentage points, the highest among all corporate and household loans.

Refinancing loans are considered the top method to reduce unsecured loan interest rates. The Financial Services Commission is preparing to launch a refinancing loan platform service for unsecured loans by the end of next month. This service will allow users to compare unsecured loan interest rates from first-tier and second-tier financial institutions at a glance through an app and immediately switch to the cheaper option on the spot.

A financial industry official said, "Consumers sensitive to interest rate changes sometimes apply for the right to request a rate reduction, but the most certain way to reduce interest costs is to refinance the loan," adding, "You can refinance a negative balance account anytime after it has been open for a month."