[Reporter’s Notebook] Concerns That Lowering the Maximum Interest Rate May Repeat the Mistakes of the Lease Act

[Asia Economy Reporter Kim Hyo-jin] "You have seen the side effects of the Lease 3 Act, which was created with the good intention of stabilizing tenants' housing. Lowering the maximum interest rate will become a poison in the loan market for ordinary people, contrary to its purpose."

This was a sharp remark from a financial sector official regarding the calls for lowering the legal maximum interest rate (annual 24%) made not only by politicians but also by heads of related ministries. It implies that the phenomenon where the 'Housing Lease Protection Act,' intended to protect tenants, has instead pushed tenants into chaos with soaring jeonse and monthly rent prices and a shortage of listings could also occur in the realm of microfinance.

On the 5th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, said at the National Assembly Budget and Accounts Special Committee comprehensive policy inquiry, "Since the interest rate level has decreased, there is a need to consider some downward adjustment of the (maximum interest rate)." Eun Sung-soo, Chairman of the Financial Services Commission, also agreed, saying, "It is right to move in the direction of lowering it." As politicians and economic and financial policy leaders share the need to lower the maximum interest rate, there is a high expectation that the issue will gain momentum going forward.

The justification for lowering the maximum interest rate is to reduce the excessive interest burden on ordinary people such as small business owners, low-income, and low-credit borrowers, that is, the financially marginalized. Who would oppose the rationale of easing the burden on those in difficult circumstances? The problem lies in the fact that lowering the maximum interest rate could push these people off the lending cliff.

Professor Choi Cheol of Sookmyung Women's University recently warned at the 11th Consumer Finance Conference hosted by the Korea Credit Finance Association that if the maximum interest rate is lowered by 4 percentage points, about 570,000 people could be pushed outside the formal financial system. Interest rates are calculated based on a comprehensive evaluation of funding costs and the borrower's creditworthiness, and if financial companies judge that lending at a 20% interest rate is difficult, borrowers will inevitably have to rely on illegal private loans.

Professor Kim Sang-bong of Hansung University predicted that if the maximum interest rate is lowered by 1 percentage point, loan demand amounting to at least 26 trillion won from low-credit borrowers would be absorbed by illegal private lending.

It is questionable whether there is a clever solution that can lower the maximum interest rate without such concerns. The Lease 3 Act clearly shows that policies, regardless of their good intentions, can make the targeted individuals more difficult. Moving away from a simplistic approach to lowering the maximum interest rate might be more advantageous in achieving the good purpose.

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