High-Interest Card Loans Surge 25.6%... Concerns Over Household Financial Distress Trigger (Comprehensive)

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 funds flocking to card loans due to the prolonged economic difficulties caused by the COVID-19 pandemic. There are also forecasts that the delinquency rate will increase in the future, centered on these groups, potentially acting as a fuse for household financial distress.

According to the industry on the 22nd, the total card loan amount handled last month by seven companies?Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, and Hana Card?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 is also notable in March. It surged from 1.6% in January to 16.6% in February, 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 range between 15% and 20%. Compared to bank credit loans, borrowers must bear interest rates three to four 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 funds amid the economic difficulties caused by COVID-19 and medium- to low-credit borrowers who find it difficult to obtain loans from banks flocking to card loans. Although the government has introduced various support measures to alleviate financial difficulties for small business owners and self-employed individuals, it remains 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 secondary financial institutions with high interest rates but lower barriers.

The concern is that if the economic recession continues due to COVID-19 this year, card loan delinquencies will increase. Card loans mainly consist of medium- to low-credit borrowers, and due to the ease of obtaining these loans, many multiple debtors exist. If the recession persists, there is a high risk that this will become a trigger for household financial distress, according to industry views. In particular, card debt from high-interest loans such as card loans and cash services has accumulated 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 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) was 2.29% last year, a slight decrease of 2.44% compared to the previous year. Korea Credit Rating also expressed concerns about asset deterioration in card companies in a recently published report. According to Korea Credit Rating, as of the end of December last year, the high-risk card loan balance of seven specialized card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana Card) was 6.5 trillion won, accounting for 18.1% of total card loans (cash services, card loans, revolving loans). The high-risk card loan balance refers to card loan balances held by multiple debtors with a credit rating of 7 or lower who have loans from three or more financial institutions. This high-risk loan balance corresponds to about 25% of the card companies' equity capital of 26.3 trillion won.

An industry official said, "At the moment, signs of delinquency such as rising delinquency rates are not apparent," but pointed out, "If the government’s loan grace period ends and debtors do not recover normally, it could lead to greater risks."

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