"Up to 70,000 Illegal Private Loans Entered Last Year"...Growing Calls to Ease Legal Maximum Interest Rate

New Illegal Private Loans Inflow 39,000~71,000
10% Use Illegal Private Loans from 6 or More Sources
"Market-Linked Maximum Interest Rate Must Be Introduced"

Analysis revealed that up to 70,000 low-credit borrowers who were rejected for institutional loans last year newly entered illegal private financing. Calls to ease regulations, such as raising the legal maximum interest rate or linking it to market rates, are gaining momentum.

According to the "Survey Analysis Report on Low-Credit Borrowers and Loan Businesses" released by the Korea Inclusive Finance Agency on the 15th, the number of low-credit borrowers in the bottom 10% credit score bracket (based on NICE) who newly entered illegal private financing last year was estimated between 39,000 and 71,000. Compared to the previous year (37,000 to 56,000), the lower estimate increased by 2,000 and the upper estimate by 15,000. This estimate was derived by adjusting the loan approval rates for low-credit borrowers, illegal private financing migration rates, and migration amounts based on NICE credit evaluation data.

The scale of illegal private financing usage also rose sharply. Last year, low-credit borrowers used an average of 2.4 illegal private lenders, and the proportion using six or more lenders was 10.2%, more than double the previous year's 4.0%. The amount used in illegal private financing ranged from 680 billion to 1.23 trillion KRW, showing an increase of 40 billion to 590 billion KRW compared to the previous year.

The increase in illegal private financing inflow is due to the growing difficulty for low-credit borrowers to obtain loans even from loan businesses, which they use as quick cash sources. The proportion of respondents who answered that they had experienced loan rejection from loan businesses was 68%, up 4.6 percentage points from 63.4% last year. The proportions were especially high among self-employed, unemployed, low-credit, and low-income groups. Eight out of ten respondents borrowed money despite recognizing it was illegal private financing, and four out of ten reported bearing high interest rates. About 40% of respondents paid interest exceeding the principal, and approximately 33% paid interest rates of 240% or higher annually.

Accordingly, there are calls to raise or flexibly set the legal maximum interest rate. Because the maximum interest rate is capped at 20% regardless of economic conditions, the number of people being pushed out even from loan businesses, the last resort, is increasing. The Korea Inclusive Finance Agency emphasized, "Rather than being fixated on the interest rate itself, efforts should be made to improve financial accessibility for as many people as possible," and added, "Flexible regulations considering changes in the financial environment, such as introducing a market-linked maximum interest rate, are necessary." The need to revitalize loan businesses was also raised. Considering the positive aspects of loan businesses, it was suggested to lower funding costs through limited measures such as bank borrowing, public bond issuance, and asset securitization.

The survey was conducted from December last year to January this year, targeting 5,478 low-credit borrowers (credit grades 6 to 10) who used loan businesses and illegal private financing.