Surge in High-Interest Card Loan Borrowing... Will the Debt Bomb for Low-Income People Ignite Again?

March Card Loan Loans by 7 Card Companies Total 4.3242 Trillion KRW
Up 25.6% Compared to Same Period Last Year

[Asia Economy Reporter Ki Ha-young] Last month, the amount of card loan disbursements surpassed 4 trillion won. This is interpreted as low-credit and low-income individuals or small business owners in urgent need of cash flocking to card loans due to the prolonged COVID-19 pandemic and the resulting economic difficulties. There are also forecasts that the delinquency rate will increase in the future, centered on these groups, potentially acting as a fuse for household insolvency.

According to the industry on the 22nd, the total card loan amount handled by seven companies including Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, and Hana Card last month was 4.3242 trillion won, an increase of 882.5 billion won (25.6%) compared to the same period last year. After maintaining the 3 trillion won range with 3.9148 trillion won in January and 3.8685 trillion won in February, the amount exceeded 4 trillion won last month.

The growth rate compared to the previous year in March is also notable. It surged from 1.6% in January to 16.6% in February, and then soared to 25.6% in March.

Card loans, which are high-interest loan products, allow borrowing up to 100 million won for a maximum of 36 months depending on creditworthiness. Although interest rates vary by card company, most are between 15% and 20%. Compared to bank credit loans, borrowers must bear interest rates that are 3 to 4 times higher. However, cash can be obtained immediately without a separate loan screening process.

The surge in card loans last month is analyzed to be due to small business owners urgently needing cash amid the economic difficulties caused by COVID-19 and mid-to-low credit borrowers who find it difficult to get loans from banks flocking to card loans. Although the government has introduced various support measures to alleviate the financial difficulties of small business owners and self-employed individuals, it is still difficult to secure funds, with hundreds of people waiting for loan consultations. Ultimately, those in urgent need of money have no choice but to take out loans from the secondary financial sector, which has high interest rates but lower barriers.

The problem is the concern that card loan delinquencies will increase if the economic recession continues due to COVID-19 this year. The industry’s view is that card loans are mainly composed of mid-to-low credit borrowers and, due to the easy loan characteristics, there are many multiple debtors, so if the recession continues, it poses a high risk of becoming a trigger for household insolvency. In particular, card debt caused by high-interest loans such as card loans and cash services has piled up like a snowball every year, producing many credit delinquents.

If non-performing loans increase, financial companies will inevitably reduce loans to low-income and low-credit borrowers to manage soundness in the future, which in turn will increase the number of ordinary people pushed into the private loan market. According to the Financial Supervisory Service, the card delinquency rate based on loans overdue by more than one month (excluding refinancing loans) last year was 2.29%, slightly down 2.44% from the previous year.

An industry official said, "At the moment, signs of delinquency such as rising delinquency rates will not appear," but pointed out, "If the government’s loan grace period ends and debtors do not recover normally, it could turn into a bigger risk."

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