[Reporter’s Notebook] To Lower Interest Rates for Low-Credit Borrowers, Tailored Credit Evaluation Is Essential

The "Rate Gap" Phenomenon: Mismatch Between Credit Scores and Delinquency Rates
Lowering Interest Rates to Improve Repayment Rates
Individual Credit Evaluation Models Matter More Than Budget Expansion

"For those who truly need to borrow 5 million won, can't we offer a lower rate than 15.9%?"

This was a question raised by President Lee Jaemyung during a Cabinet meeting in September. The context was whether it would be possible to raise interest rates for high-credit borrowers in order to reduce the burden on those with low credit. In response, the Financial Services Commission is currently reviewing measures to lower interest rates for low-credit borrowers.

Financial support for low-credit individuals is a key policy of the Financial Services Commission. The "Special Guarantee for the Lowest Credit Borrowers" and the "Illegal Private Loan Prevention Loan," both mentioned by the President, are representative policy finance programs in which the government subsidizes interest rates. By allocating budget funds, the government lowers loan rates for low-credit borrowers, who would otherwise face inevitably high interest, to around 15.9% per year.

The President’s remark highlights the concern that "even this rate is still too high." The method to further reduce policy finance interest rates is simple: increase the budget. If the government covers more of the interest, the rates go down. The new administration plans to establish a "Public Financial Stability Fund" by 2027 to expand policy-based financial support for low-income individuals. Funding will come from the government budget and contributions from financial institutions. The intent is clear: lower interest rates through government support and raise repayment rates.

However, improving repayment rates among low-credit borrowers should not be limited to simply expanding the budget. Steps to make credit evaluations by financial institutions more sophisticated must also be actively considered.

Lee Eogwon, Chairman of the Financial Services Commission, also stated at a recent meeting that "credit evaluations by financial institutions are not perfect, which creates an 'interest rate gap' where borrowers cannot access loans at rates between 7% and 15%." If rates are set mechanically based on fragmented data such as income, card usage, and loan history, then low-income, vulnerable groups are assessed as having high default probabilities, resulting in either loan denial or approval at high interest rates, which in turn increases delinquency rates.

Actual statistics support this. According to data submitted by Assemblyman Chun Haram of the Reform New Party, the delinquency rate among low-credit borrowers rose from 16.4% in the first quarter of 2021 to 23.8% in the second quarter of this year, based on figures from the Bank of Korea. In contrast, the delinquency rate for high-credit borrowers remained below 1% during the same period.

Ultimately, the key lies in "tailored credit assessment." It is essential to advance personal credit evaluation systems and design structural incentives to encourage private financial institutions to participate in the mid- to low-credit borrower market. In the long run, establishing a sound interest rate calculation structure for public finance is more important than short-term interest subsidies.

The scale of policy-based financial support for low-income individuals already reaches 10 trillion won per year-a substantial amount. To ensure that this massive funding does more than simply subsidize interest, the government should focus on "sustainable financial market design" rather than just "expanding support." Only then can low-credit borrowers, financial institutions, and national finances all remain resilient together.