[The Trap of Illegal Private Loans] ① Where Did the 1.5 Million People Disappeared from the Loan Business Go?

As the Legal Maximum Interest Rate Continues to Drop
Legitimate Loan Companies Close and Stop Lending
Only Ordinary People Are Driven to Illegal Private Loans

1.5 million people. That's the population of a typical metropolitan city. It is also the number of loan shark users who have disappeared over the past six years. It may seem fortunate that fewer people are turning to loan sharks for help. However, the expression changes when you look into the details.

South Korea's loan shark market operates legally under the Loan Business Act and is regulated by financial authorities. It is even subject to the same level of statutory maximum interest rate regulations as savings banks or capital loans. On the other hand, the ruthless Joseonjok illegal loan sharks depicted in the movie Crime City are literally illegal loan sharks. Although they are completely different, they are closely related. This is because if you cannot borrow money from legal loan sharks, you are immediately pushed into the illegal loan shark market.

This is why financial authorities and the loan shark industry are paying attention to the 1.5 million people who have disappeared. According to the Financial Supervisory Service's "Registered Loan Business Survey," the number of loan shark users peaked at 2,495,000 in the first half of 2017. By the second half of last year, it had dropped to 989,000. The number of loan shark users decreased by 1,506,000 over six years.

There is another notable point when looking at the loan volumes during the same period. Secured loans (3.0395 trillion KRW → 8.9048 trillion KRW) increased, but personal unsecured loans (12.3957 trillion KRW → 6.963 trillion KRW) were cut in half. In other words, "people who have no collateral and low credit but urgently need cash have been pushed out of the legal loan shark market."

Lee Jae-seon, Executive Director of the Korea Loan Finance Association, said, "Loan shark users are low-income people in the bottom 20% of credit scores. Do you think the 1.5 million people who disappeared suddenly improved their living conditions or received government policy loans? No. It is highly likely that they moved to the illegal loan shark market." A Financial Supervisory Service official from the Consumer Finance Bureau also expressed concern, saying, "Considering the trend of decreasing loan shark users and increasing loan amounts per person and delinquency rates, it is highly likely that low-credit groups excluded from the loan shark market are using illegal private financing."

Legal Loan Shark Companies Damaged by 20% Maximum Interest Rate

The loan shark industry is collapsing. The exodus of users is like a receding tide. Why has the legal financial market, which is the last resort for low-credit citizens, reached this state? The industry points to the statutory maximum interest rate set by law as the cause. The statutory maximum interest rate, which was 49% in 2010, has now been lowered to 20%. Loan shark companies were able to survive by expanding their size until 2017 when the statutory maximum interest rate was 27.9%. However, as it dropped to 24% in 2018 and then to 20% in 2021, loan shark companies also collapsed.

Executive Director Lee compared this phenomenon to the minimum wage increase. "When the minimum wage was raised to 10,000 KRW per hour to help low-income people, store owners ended up laying off workers. The loan shark industry is the same. The National Assembly recklessly lowered interest rates to help low-income people, but loan shark operators could not make a profit and exited the market. Top companies like Sanwa Money, Rush & Cash, and Welcome all closed down. What was the result? Low-income people could not borrow money from legal loan sharks and were pushed into the illegal loan shark market."

Is the current statutory maximum interest rate of 20% still too high? Loan shark operators argue that it is not "20% on a 100 million KRW loan." A loan shark industry insider explained, "Most first-time personal unsecured loans are under 5 million KRW. If the borrower repays without interest delinquency for about six months, the limit is increased, but the maximum limit does not exceed 10 million KRW, which is the industry's 'national rule.' For a 5 million KRW loan at 20% interest, the monthly interest is about 80,000 KRW."

Loan shark companies raise funds by borrowing loans with annual interest rates of 9-10% from savings banks or capital companies. Adding loan losses due to a delinquency rate of up to 10%, loan agent commissions, and operating expenses, they say there is no profit even at a 20% interest rate. When the base interest rate soars, as it did last year, the funding cost rises further. Since the maximum interest rate remains unchanged, loan shark companies have only two choices: stop lending or close down.

The National Assembly Ignores 1.5 Million People... Illegal Loan Sharks Grow Fat

The Financial Services Commission also tried to ease the credit crunch for low-income people. Earlier this year, the FSC proposed raising the statutory maximum interest rate to lawmakers from both ruling and opposition parties. The FSC can raise the statutory maximum interest rate to 27.9% by revising the enforcement decree of the Loan Business Act on its own, but since interest rates are a very sensitive issue, consent was needed. However, the political circles rejected the proposal, fearing that public opinion might misinterpret it as a wrong signal and negatively affect approval ratings. It was a calculated neglect.

As a result, the 1.5 million people who disappeared from the loan shark market have been trapped in darkness with no one paying attention. Meanwhile, reports of illegal loan shark damages are increasing. The Financial Supervisory Service announced that reports of unregistered loan businesses, exceeding maximum interest rates, and illegal debt collection increased by 12% last year to 10,913 cases from 9,918 cases the previous year. This means illegal private financing is rampant.

"Mr. Kang, who already had a debt of 300 million KRW, needed operating expenses for his auto repair shop. When he could not get a loan from a loan shark company, he used a short-term emergency loan of 950,000 KRW (contracted as 1.4 million KRW) through an internet loan site. When repayment was delayed, the illegal loan shark demanded repayment of the principal, claiming it was unpaid, even after receiving 1.82 million KRW in extension fees over ten times. When he refused, they verbally abused him and threatened his family." (A case reported to the Korea Loan Finance Association last year and resolved through debt adjustment)

According to Korea Credit Bureau (KCB), the bottom 20% of the credit rating population, who are potential customers for loan sharks (based on the distribution of credit scores among credit transaction customers), is estimated at 4,202,242 people. This is also the number of people who are always at risk of having to turn to the illegal loan shark market if they fail to get emergency loans from legal loan sharks.