High-Income Earners' Debt Decreases, Low-Income Earners' Debt Increases... "Loan Polarization" [The Shadow of High Interest Rates]②

'Status and Risk Assessment of Household Debt' Report
Reducing Investment Loans for High-Income, High-Credit Borrowers
Increasing Living Expense Loans for Low-Income, Low-Credit Borrowers

On the 21st, a notice about personal credit loan interest rates was posted at a commercial bank in Seoul. Photo by Jinhyung Kang aymsdream@

The characteristics of borrowers clearly differ before and after the interest rate hikes. Before the hikes, high-credit and high-income individuals borrowed large amounts for investment purposes. As interest rates rose, the number of borrowers decreased. Instead, the proportion of loans taken by people with lower income levels or credit scores increased compared to the past.

According to the report "Sectoral Debt in the Korean Economy After COVID-19" by the Korean Finance Association on the 20th, this trend is evident. The number of new borrowers increased significantly from 1.83 million in 2019 to 1.92 million in 2020, and then to 2.27 million in 2021. However, in 2022, when interest rates sharply rose, the number dropped to 1.58 million.

During the period from 2019 to 2021, when household debt surged dramatically, high-credit borrowers increased their loans. Looking at the credit score distribution of new borrowers, those with scores above 900 accounted for 36.2% at the end of 2019, rising to 39.9% by July 2021, just before the Bank of Korea raised the base interest rate. This was the highest proportion among all credit score ranges.

By the end of December 2022, when interest rates had jumped significantly, the situation changed completely. The proportion of high-credit borrowers dropped sharply to 35.4%. Conversely, the relative share of lower-credit borrowers (those with scores between 800 and 900, and between 700 and 800) had been declining until 2021 but showed an increase in 2022.

Professor Lee Yoon-soo of the Department of Business Administration at Sogang University conducted this study based on data from NICE Information Service. Professor Lee explained, "As interest rates rose, high-credit borrowers who had taken large loans repaid their debts, and investment-related loans decreased. On the other hand, the proportion of low-credit and low-income borrowers who need loans for living expenses increased despite the higher interest rates."

Looking at the Debt Service Ratio (DSR), which indicates the ratio of principal and interest repayments to annual income, polarization was evident before and after the interest rate hikes. Comparing August 2021 (base interest rate 0.75%) to January this year (base interest rate 3.50%), more than 3 out of 10 borrowers in the lower income brackets (1st to 3rd quintiles) experienced an increase of 5 percentage points or more in their DSR. Meanwhile, among borrowers in the higher income brackets (4th to 5th quintiles), only 2 out of 10 saw a 5 percentage point or greater increase in DSR.

Professor Lee stated, "Borrowers with lower income levels faced increased principal and interest repayment burdens as interest rates rose, leading to higher DSRs." He added, "The main cause is that while the principal repayment remained low, interest costs increased. As household debt levels rise and interest rates go up, household consumption is constrained."