To Avoid Repeating the 'Paradox of Goodwill,' Illegal Loans Must Be Tackled First

Legal Maximum Interest Rate to Drop from 24% to 20% Next Year... Concerns Over Decrease in Low-Credit Loans
When Reduced by 3.9%P in 2018, 40,000-50,000 People Moved to Unregulated Markets
Special Crackdown Period on Illegal Private Loans Set Until Year-End for Nationwide Enforcement

[Asia Economy Reporter Donghoon Jung] #Han-young Lee (31, pseudonym), a job seeker struggling with living expenses, was unable to get a loan from a bank due to low credit. However, he turned to an online loan brokerage site he found through social networking services (SNS). Although he knew the interest rates were high, he had no choice. He borrowed 1.5 million won and had to pay an ultra-high interest rate exceeding 300% per annum. He said, "Because of financial difficulties, I had no choice but to use a place that would at least lend me money," adding, "I hope illegal loans are eradicated so that no more victims emerge."

There are concerns that the planned reduction of the legal maximum loan interest rate, intended to ease the burden on low-income people, may instead push vulnerable groups into the illegal private loan market. Experts emphasize the urgent need to establish more structured support measures for low-credit borrowers. Professor Tae-yoon Sung of Yonsei University’s Department of Economics pointed out regarding next year’s plan to lower the legal maximum interest rate, "If the interest rate reduction is this steep, it could worsen the situation as low-income people move to illegal private loans and other alternatives." Professor Chul Choi of Sookmyung Women’s University’s Department of Consumer Economics also said, "Some of those who paid high interest rates to borrow from formal financial institutions end up using illegal private loans."

According to the announcement by the government and ruling party on the 16th, the current legal maximum interest rate of 24% per annum will be lowered to 20% in the second half of next year. The government explained that this would reduce the annual interest burden by 483 billion won for about 2.08 million (87%) of the 2.39 million people who used loans with interest rates above 20%. However, this is expected to lead financial institutions to refuse loans to low-credit borrowers whose interest rates were previously between 20% and 24%.

In fact, when the legal maximum interest rate was lowered from 27.9% to 24% in 2018, the use of illegal private loans reportedly increased by about 300 billion won compared to the previous year.

The government has introduced measures such as expanding the supply of policy-based financial products for low-credit borrowers, like the "Sunshine Loan" (Haetsal Loan), by more than 270 billion won annually. However, experts point out that relying solely on the Sunshine Loan still presents issues such as fund depletion and loan eligibility.

Meanwhile, the illegal loan market targeting low-income people in credit blind spots is growing. The number of reported cases to the Financial Supervisory Service’s Illegal Private Loan Reporting Center reached 26,077 in the first half of this year, a 15.9% increase compared to 22,491 cases in the second half of last year. This figure includes loan fraud through voice phishing and ultra-high-interest loans. The increase in loan fraud cases alone is even steeper. In the first half of this year, 13,530 cases were reported, which is 32.7% higher than the 10,192 cases in the second half of last year and more than double the 6,250 cases in the first half of last year. The government has designated the end of the year as a "Special Eradication Period for Illegal Private Loans" and is conducting a comprehensive crackdown.

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