[Reporter’s Notebook] Can Good Intentions Alone Protect the Vulnerable?

President Lee's Remark on Raising Interest Rates for High-Credit Borrowers to Ease Burden on Low-Credit Borrowers Sparks Controversy
Good Intentions Do Not Always Lead to Good Outcomes

Jaehee Kwon, Economic and Financial Department Reporter

In 2019, the state of California in the United States pushed for legislation to cap small loan interest rates at 36% per year. The intention was to reduce the interest burden for low-income and low-credit individuals, but the outcome was different. As financial companies found it difficult to secure returns commensurate with risk, they became reluctant to lend, and low-credit borrowers were driven to illegal online loans or high-interest private lenders. A system that began with good intentions ended up putting vulnerable people at even greater risk. This is the so-called "paradox of regulation."

Recently, President Lee Jaemyung's remarks have sparked controversy in a similar context. During a cabinet meeting, he proposed, "Let's slightly raise the loan interest rates for high-credit borrowers to lower the burden for low-credit borrowers." While the intention to help those with limited access to finance is understandable, the problem is that good intentions do not necessarily lead to good policy.

The president's statement overlooks the "risk cost" borne by financial institutions. The reason financial companies set different interest rates for each borrower is not to reap excessive profits but because of the "risk premium" that reflects the likelihood of default. Loan interest rates are composed of funding costs, operating expenses, risk premiums, and margins. The lower the credit score, the higher the risk premium and, consequently, the interest rate. This is a rational structure by which finance operates.

Interest rate regulations that ignore the risk premium lead to side effects. Financial companies lose the incentive to lend to high-risk borrowers, and low-credit individuals are pushed out of the formal system and toward illegal loans. Alternatively, financial companies may raise fees to pass on the costs. A policy intended to "help ordinary people" could end up tightening the noose around them instead.

The president said, "We lend a lot to top-tier customers at ultra-low interest rates. Could we not add just 0.1% to allow low-credit borrowers to borrow at lower rates?" At first glance, this may give the impression that high-credit borrowers are enjoying excessive benefits.

However, in modern capitalist societies, credit scores function as an economic "ID card." A credit score is an indicator that reflects one's financial transaction history; those with stable histories receive lower interest rates, while those with greater risk face higher rates. This is not discrimination but a rational classification based on probabilistic risk. It is the same logic as car insurance premiums being higher for drivers with more accident history.

Therefore, to protect the vulnerable, it is necessary to advance the credit evaluation system and strengthen tailored guarantee programs and policy finance. For young people just starting their careers or small business owners with insufficient credit history, alternative credit assessment should be introduced to lower entry barriers. For groups that unavoidably carry higher risk, government guarantees should be used to reduce the burden on financial institutions.

The success or failure of a policy depends not on intent but on its design and implementation. For the slogan "help the vulnerable" to have real power, policies must be crafted on a foundation that does not disregard the operating principles of the financial market. We must not forget that good intentions do not always lead to good outcomes.