Economic Recession... High-Interest Card Loans Used 31 Trillion Won Last Year (Comprehensive)

Card Loans Accumulated in Q3 Last Year
Increased by 1.1654 Trillion KRW Compared to Same Period Last Year
Low Credit and Low Income Borrowers Concentrate Amid Recession
Rising Delinquency Rate Raises Default Concerns

[Asia Economy Reporter Ki Ha-young] Last year, amid employment instability due to the economic downturn and a slump in self-employment, the use of card loans, which are high-interest long-term loans, increased. With financial authorities announcing regulations on card loans, it is interpreted that low-credit, low-income individuals or small-scale self-employed people who could not pass the threshold of primary financial institutions in urgent need of funds flocked to these loans. As the economy worsens, delinquency rates are also rising among these groups, raising concerns about loan defaults.

According to the Financial Supervisory Service's Financial Statistics Information System on the 8th, the amount of card loan usage by seven card companies (Shinhan, KB Kookmin, Lotte, Woori, Samsung, Hana, Hyundai Card) reached 31.3471 trillion KRW by the third quarter of last year. This is an increase of 1.1654 trillion KRW (3.86%) compared to the same period the previous year.

The reason for the increase in card loan usage is that major domestic card companies expanded card loans to compensate for the revenue loss caused by the reduction in merchant fees. In fact, the proportion of card loans in the total credit card usage amount (lump sum + installment + cash service + card loan) of card companies mostly increased by the third quarter of last year. The company with the largest increase in card loan proportion was Lotte Card. In the third quarter of last year, Lotte Card's card loan ratio was 6.45%, up 1.11 percentage points from 5.34% for the entire previous year. Industry leader Shinhan Card also increased from 6.19% to 6.51% during the same period, and Samsung Card rose from 5.92% to 6.25%, an increase of 0.33 percentage points. Woori Card also slightly increased from 4.33% to 4.61% during this period. Hana Card remained at a similar level of 6.94% compared to the end of the previous year. Hyundai Card and KB Kookmin Card saw slight decreases.

The problem is that the main users of card loans are low-credit, low-income individuals who urgently need funds. Card loans allow borrowing up to 100 million KRW for a maximum of 36 months depending on creditworthiness. Although card loan interest rates vary by card company, most are between 15% and 20%. Compared to bank credit loans, borrowers must bear interest rates that are three to four times higher.

The increase in card loans leads to a rise in delinquency rates. In fact, Shinhan Card recorded a delinquent loan ratio (including refinancing loans) of 1.65% for loans overdue by more than one month in the third quarter of last year. This is an increasing trend following 1.49% in 2017 and 1.53% in 2018. Lotte Card and Woori Card also saw delinquency rates rise to 1.65% and 1.84%, respectively, in the third quarter of last year, up from 1.37% and 1.78% the previous year.

The rise in card company delinquency rates is related to the economic recession. As card company delinquency rates rise, it indicates that the repayment ability of vulnerable borrowers such as low-credit and low-income individuals is rapidly declining as the economy freezes further. Financial companies facing increasing bad loans will inevitably reduce lending to low-income groups to manage future soundness. In such cases, the number of ordinary citizens pushed into the private loan market will increase.

A financial industry insider said, "The expansion of card loans is a short-term measure for card companies to maintain profitability," adding, "Since financial authorities also manage and supervise card loans, further expansion will be difficult."

In fact, from April, card companies will face stricter marketing restrictions, such as a ban on selling products that reverse interest rates between credit grades for card loans. This reflects the financial authorities' policy direction to eliminate the structure in which card companies easily profit from card loans. Earlier, in September last year, Financial Supervisory Service Governor Yoon Seok-heon pointed out the overheated marketing of card loans by some card companies at a meeting with card company representatives, saying, "Cases such as failure to fulfill customer explanation obligations or issues with card loan interest rate calculation at some card companies will not only damage the company's image but also undermine consumer trust in the card industry."

This content was produced with the assistance of AI translation services.