Legal Maximum Interest Rate Nears 24%... Cash Service Usage Declines Despite COVID-19 (Comprehensive)

Legal Maximum Interest Rate Nears 24%
Preference for Low-Interest Small Loans

[Asia Economy Reporter Ki Ha-young] Despite COVID-19, the number of people using cash services (short-term loans) for urgent cash needs has significantly decreased. This is attributed to the high interest rates nearing the legal maximum rate (24%) and the diversification of low-interest small loan products.

According to the credit finance association's disclosure on the 3rd, as of the end of December last year, the average interest rate (operating price) for cash services based on the standard grade of seven full-service card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) ranged from 18.50% to 19.48%. The average rate among the seven companies was 18.94%, which is 5.62 percentage points higher than the 13.32% for card loans (long-term loans) during the same period.

The Credit Finance Association expanded the disclosure based on the standard grade, which had been applied to card loans and credit loans since the end of last month, to include cash services. The standard grade standardizes each card company's internal rating into a 10-grade system based on the default rate (the probability of being overdue for more than 90 days within one year).

The card company with the highest average interest rate for cash services was Hana Card at 19.48%. KB Kookmin (19.22%) and Hyundai Card (19.03%) also recorded rates above 19%. Samsung (18.89%), Lotte (18.77%), and Woori Card (18.69%) followed. The lowest average interest rate for cash services was 18.50%, recorded by Shinhan Card.

For high-credit customers in grades 1-2, KB Kookmin Card offered the highest rate at 15.19%. In contrast, Lotte Card recorded the lowest rate at 10.89%. There was a difference of up to 4.3 percentage points in interest rates depending on the card company. For low-credit customers in grades 9-10, the interest rates approached the legal maximum rate of 24%. Hyundai Card lent money at the highest rate of 23.71%, while Woori Card, which offered the lowest rate to low-credit customers, still recorded 21.37%.

Cash Service Usage Amount Drops from 26 Trillion Won to 4 Trillion Won in 17 Years

Customers using cash services generally have lower credit ratings than those using card loans. Nearly 50% of cash services apply high interest rates above 20%, whereas card loans are around 15%. Due to the high interest rates, the use of cash services is also declining. According to the Bank of Korea's economic statistics system, the amount of personal cash service usage by credit card companies recorded 4.5217 trillion won as of the end of October. This is a 3.72% increase from September's 4.3595 trillion won, which was the lowest since 2003, but it is a sharp 11.9% decrease compared to the same period last year. The amount of cash service usage, which reached 26 trillion won in 2003, has decreased to the 4 trillion won level over 17 years.

The amount of cash service usage is expected to continue declining. From the second half of this year, the legal maximum interest rate will be lowered from 24% to 20%, and according to the revision of the 'Standard Terms and Conditions for Credit Card Individual Members,' cash services will only be available upon separate application when issuing new credit cards. Low-credit customers who previously used cash services may face restrictions on using cash services as card companies manage delinquency rates due to the reduction of the legal maximum interest rate. Additionally, with the change in the standard terms, the threshold for receiving cash services has increased, so the influx of new customers intending to use cash services is also expected to decrease.

An industry insider said, "As cash usage has decreased and small loans with low interest rates are increasing through internet banks and others, the number of customers using cash services is declining," adding, "The incentive to use high-interest cash services, which approach the legal maximum interest rate, is diminishing."

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