'Interest Unpaid Transfer' Card Loan Refinancing Balance Up 29% in One Year

Tightened Wallets of Low-Credit and Working-Class Borrowers

'The balance of refinancing loans from domestic card companies has increased by more than 20% in one year. This indicates that the number of borrowers who cannot afford or are at risk of not being able to afford the interest due to high interest rates and signs of economic recession is rising. It appears that the financial situation of low-credit and low-income groups is becoming even more strained.

According to the Credit Finance Association on the 9th, the balance of card loan refinancing from domestic card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana, NH Nonghyup, BC) at the end of last month was 1.1727 trillion KRW. This is a 28.8% increase compared to the same period last year (approximately 910.1 billion KRW).

Card loan refinancing refers to a system where borrowers who have defaulted on or are at risk of defaulting on card loans are lent the debt amount again. For example, borrowers facing the risk of default on card loans are encouraged to switch to other loan products or specialized products for middle- and low-credit borrowers such as Hae-sal-loan, thereby preventing default and promoting repayment.

Such card loan refinancing does not fall under non-performing loans (NPL), which is a key indicator of credit soundness. However, since borrowers struggling to repay card loans apply despite higher interest rates and credit rating downgrades, these loans are classified as loan assets with a high risk of becoming non-performing.

The balance of card loan refinancing in the card industry remained at about 910.1 billion KRW until early December last year, but surpassed the 1 trillion KRW mark by the end of the year, increasing by about 130 billion KRW in just three months. A financial sector official said, “Although these are not NPLs, since they target borrowers who are effectively in default or at risk of default, it reflects the worsening financial conditions of low-credit and low-income borrowers.”

The primary reason for the increase in refinancing loan balances is the sharp rise in interest rates. The average interest rate on card loans from the seven major domestic card companies was 12.92% in June last year but rose by more than 2 percentage points to 15.06% by the end of the year. This was due to the rapid interest rate hikes by the U.S. Federal Reserve (Fed) and the bond market tightening triggered by the ‘Legoland incident,’ which caused card loan interest rates to rise quickly.

As of last month, the rate has decreased to around 13.99%, showing a relatively stable trend, but the card loan interest rates applied to middle- and low-credit borrowers approach the legal maximum interest rate. Especially given the nature of card loans as a ‘quick cash window’ for middle- and low-credit borrowers, the high base interest rates and economic recession likely have significantly impacted borrowers’ repayment ability.

The declining repayment ability of low-credit and low-income groups is also confirmed by other indicators. The revolving payment balance (revolving credit) of nine domestic card companies reached 7.215 trillion KRW, an increase of 15.6% (973.1 billion KRW) compared to last year. Despite the revolving service’s fee rates approaching the legal maximum interest rate, the balance increased by nearly 1 trillion KRW in one year.

As this situation continues, the card industry is closely monitoring credit soundness management. Looking at the recent performance disclosures of Shinhan, Samsung, KB Kookmin, Woori, and Hana Card, their delinquency rates as of the first quarter all exceeded 1%, ranging from 1.10% to 1.37%. This is the first time in two years that the card industry’s delinquency rate has exceeded 1%.

An official from the card industry said, “In the case of card loan refinancing, since the financial sector grants opportunities to borrowers who have defaulted or are at risk of default, it is practically equivalent to being non-performing.” He added, “Although a refinancing loan platform involving multiple financial companies is expected to be launched by the end of this month, which may somewhat improve the situation, it is uncertain whether it will provide real help to card loan refinancing borrowers, as they have low credit ratings and weak repayment ability.”