[DSR Trap] ① 'Half of Annual Income Goes to Bank Debt Repayment, But Refinancing Loans Is Impossible? ... 'Unfair Controversy''

President Yoon's Directive for 'One-Stop Debt Refinancing Service' Launched

But No Chance to Switch if DSR Limits Are Exceeded Due to 'Refinancing Also Being a Loan Product'

Fair Opportunities Must Be Given to Those Trying to Lower Interest Rates

"How can it be that if your DSR exceeds 40%, you are not eligible for refinancing loans? In times of high interest rates like these, lowering interest is necessary for everyone. Unless you are a credit delinquent or a loan defaulter, people should be allowed to refinance freely. Isn't blocking this with DSR regulations discriminatory?"

Kim Seo-hee (46), who runs a snack bar in Ilsan, tried to lower the interest rates on her unsecured loans from her main bank and savings bank by using the 'One-Stop Refinancing Loan Service,' but she only saw the message 'No available products' and was frustrated. Complaints from people in similar situations as Kim are emerging on internet communities. The reason their refinancing attempts are blocked is due to the DSR (Debt Service Ratio) regulation.

DSR refers to the proportion of your annual income that must be used to repay principal and interest within a year. Since July last year, the Financial Services Commission has set regulations limiting DSR to 40% for primary financial institutions and 50% for secondary financial institutions. For example, if your annual salary is 50 million KRW, you can only take loans where the principal and interest repayment does not exceed 20 million KRW or 25 million KRW per year, respectively. This applies to anyone who has borrowed more than 100 million KRW from financial companies. The regulation was strengthened to prevent households from taking on excessive debt as household debt surged rapidly.

The problem is that this DSR regulation is applied without exception to the 'One-Stop Refinancing Loan' service that started on the 31st of last month. The Financial Services Commission stated, "There has been no change to the existing DSR limit regulations since the launch of this service," and "You can only move to loan conditions presented within the scope of compliance with the regulations." In other words, those who exceed the DSR limit cannot use this service.

It is common sense that refinancing loans to lower interest should not be subject to DSR regulations

▲As of the fourth quarter of last year, 32% of all borrowers have a DSR exceeding 40%. This means that 3 out of 10 borrowers are unable to use debt refinancing services. Among vulnerable borrowers, 6 out of 10 (61.2%) fall into the category of having a DSR over 40%, and they also face restrictions in using debt refinancing services.

There are criticisms that this is illogical. If financial consumers succeed in switching to lower interest rates through the one-stop refinancing loan, they reduce interest costs and consequently lower their DSR. Refinancing is just switching loans, so the total loan amount does not increase. Yet, borrowers whose DSR exceeds the regulatory ratio are excluded from eligibility simply because 'refinancing is still a loan.'

Professor Sung Tae-yoon of Yonsei University's Department of Economics pointed out, "Opportunities should be fairly given to those trying to lower interest rates, but the DSR regulation has become a stumbling block," and added, "Common sense dictates that this regulation should not apply to refinancing loans."

According to the Bank of Korea, as of the fourth quarter of last year, 32% of all borrowers in South Korea have a DSR exceeding 40%. This means 3 out of 10 borrowers cannot use the refinancing loan service. The situation is even more severe among vulnerable borrowers who are sensitive to loan interest rates. Among them, 6 out of 10 (61.2%) have a DSR over 40%.

Looking at the proportion of unsecured loans among total loans, non-vulnerable borrowers have about 20%, while vulnerable borrowers have about 24%. If the DSR regulation did not apply, refinancing through the one-stop refinancing loan service would be possible in these cases.

A representative from a commercial bank said, "The refinancing loan service was launched to give all citizens a chance to lower their interest rates, but applying the DSR regulation contradicts the purpose of the service," and added, "The Financial Services Commission said it plans to enable refinancing for mortgage loans by the end of this year, but if borrowers with DSR over 40% still cannot get opportunities then, the fairness controversy will intensify."

The Financial Services Commission announced that during the first two days of the service launch (May 31 to June 1), loans amounting to a total of 105.5 billion KRW were transferred.

DSR regulation is necessary, but pitfalls must be eliminated

The strengthened DSR regulation last year played a role as a firefighter for household debt by limiting individual loan amounts. However, pitfalls have also emerged. Although now discontinued, the 'Kookmin Hope Loan' (interest rate 7.8%) product, which encouraged moving secondary financial institution loans to Kookmin Bank, had the same problem. At that time, refinancing was also blocked due to the DSR regulation.

Lee Jung-min (32), an office worker who was rejected after applying for the Kookmin Hope Loan, said, "They said multiple debtors were eligible and credit scores didn't matter, but it was just that you could apply; approval was not guaranteed," and lamented, "Many people using secondary financial institution loans have high DSR ratios like me, but people without money are discriminated against even when trying to lower interest rates."

There are some exceptions to the DSR regulation. For example, jeonse (key money deposit) loans are exempted considering they are for actual housing needs. As the jeonse crisis worsened, demands have surged to ease DSR regulations for landlords as well. Landlords must return deposits to tenants, but with jeonse prices plummeting, landlords often need to take additional loans, which is becoming impossible in many cases.

Kim Do-hyung (52), who rented an apartment in Seongbuk-gu on a jeonse basis, said, "Most landlords have mortgage loans and are hitting the DSR ceiling," and worried, "Jeonse prices dropped from 800 million KRW to 500 million KRW, so how can they come up with 300 million KRW without resorting to private loans?"

The Financial Services Commission is considering easing DSR regulations for landlords caught in reverse jeonse situations due to the surge in such cases. Although jeonse transactions are between individuals and some landlords aimed for gap investment, the priority is to prevent the jeonse crisis caused by the risk of deposit returns shifting to tenants.