Loans issued this year total 78 trillion won... How to handle interest burden as credit line rates soar

Average Overdraft Interest Rate 2.92~3.53% per Year
Up 0.6%p Compared to One Year Ago
Many Cases with Increase Over 1%p

[Asia Economy Reporter Park Sun-mi] As the Bank of Korea is expected to raise the base interest rate as early as this month, borrowers are growing increasingly concerned. In particular, interest rates on credit loans, including the easily used overdraft loans (matong), have soared, sharply increasing the interest burden. With household loans in the financial sector increasing by more than 78 trillion won this year and strong regulatory measures proving ineffective, there is a possibility that if borrowers cannot bear the increased principal and interest repayment burden due to the base rate hike, it could escalate into financial distress.

According to the Bankers Association and financial sector on the 12th, the average interest rate on overdraft loans handled by the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?in June ranged from 2.92% to 3.53% per annum. Compared to 2.62% to 2.97% a year ago, this is an increase of about 0.6 percentage points. During the same period, internet bank KakaoBank’s rate also rose by 1.14 percentage points annually.

The rise in credit loan interest rates is due to banks adjusting the total volume of household loans by reducing preferential rates or limits in response to regulatory orders, as well as the increase in the one-year bank bond rates that form the basis for interest rate calculations. The problem is that, contrary to the financial authorities’ intention that higher rates would reduce loan demand, the number of borrowers taking on debt is increasing, thereby increasing the debt burden on ordinary citizens.

This is because the frenzy of "younggeul" (borrowing to the limit) and "debt investment" (debt-financed investment) continues among younger generations in the real estate and stock markets, and the prolonged COVID-19 pandemic has made it difficult for many to repay existing debts due to worsening living conditions.

According to the Financial Services Commission, the net increase in household loans across the entire financial sector from January to July this year reached 78.8 trillion won. This is a surge of 32.9 trillion won (71.6%) compared to 45.9 trillion won during the same period last year. It is 3.3 times the increase of 23.7 trillion won recorded from January to July 2019, before the COVID-19 outbreak.

On the 9th, the loan counter at Hana Bank in Euljiro, Seoul. Photo by Mun Ho-nam munonam@

Household Loans Still Rapidly Increasing... Twice the Annual Growth Rate Management Target of 5-6%

Even looking at July alone, when the debt service ratio (DSR) regulation of 40% was applied to borrowers, the loan growth trend is clear. Household loans across all financial sectors increased by 15.2 trillion won last month, surpassing the 10.3 trillion won increase in June. The year-on-year growth rate of household loan balances at the end of July was 10%, double the annual growth rate management target of 5-6%.

The household loan growth rate fluctuated between 8% and 8.5% from November last year to March this year for five months, then rose to a high level of 9.6% to 10% from April to July for four months. Industry insiders cite the failure to control real estate prices, which expanded the increase in mortgage loans, and the enthusiasm for public stock subscriptions through KakaoBank and others, which significantly increased credit loans including overdraft loans, as the main causes despite the looming interest rate hike crisis.

The financial authorities have decided to tighten supervision to manage the total household debt growth rate at around 5-6%, and Financial Services Commission Chairman Eun Sung-soo has explicitly ordered financial holding company chairmen accordingly. Therefore, there is a high possibility of additional signals to suppress loan growth to 3-4% by the end of the year. However, if factors inducing loan increases such as real estate and stock investments do not subside, there is concern that this could have the adverse effect of only increasing interest burdens.

Park Sung-jin, Deputy Director of the Market General Team at the Bank of Korea’s Financial Market Department, forecasted, "Because there is still strong demand for funds related to housing sales and jeonse (long-term lease deposits), other loans for risky asset investments such as stocks, and COVID-related living and business funds, it will be difficult for the household loan growth trend to slow significantly."

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