Loan Limit Reduction for Yeongkkeul and Bittu Borrowers, Outcry Over Interest Rate Hikes

Loan Suspension, Limit Reduction, and Interest Rate Increase: Triple Hardships

[Image source=Yonhap News]

[Asia Economy Reporter Park Sun-mi] "This month, the interest rate applied to credit loan extensions rose from 1.9% to 2.9%. I had no income due to parental leave, but I was told to repay 10 million won of the principal, so I paid it back. I took out a ‘Yeongkkeul’ (borrowing to the limit, pulling together every possible resource) loan when buying my house, but it’s tough."

"I paid 1.63 million won last month for principal and interest on my ‘Yeongkkeul’ mortgage loan, but due to the interest rate hike, I had to pay 1.72 million won this month, which is 90,000 won more in just one month. With a monthly salary of 3.5 million won, repaying debt has been very difficult, and I’m worried since interest rates are expected to keep rising."

Riding the social trend of borrowing to invest, many borrowers who have been drawing on bank loans are increasingly voicing difficulties due to the financial authorities’ strengthened household loan management, which includes reduced loan limits and interest rate hikes. Following major commercial banks’ simultaneous application of loan limit reductions and interest rate increases as part of total household loan volume management, this trend is spreading throughout the financial sector, putting existing borrowers at risk of facing even greater debt repayment burdens.

According to the Bankers Association on the 23rd, the average interest rates for credit loans issued in July by the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?ranged from 3.03% to 3.63%, about 0.92 percentage points higher than the 2.11% to 2.47% range a year ago. The interest rates for installment repayment mortgage loans also rose, with July’s rates between 2.65% and 3.11%, up 0.41 percentage points at the upper end compared to 2.45% to 2.70% a year earlier.

Interest rates continue to trend upward. As banks reduce preferential interest rates on credit loans, cases have emerged this month where borrowers with a top credit rating of grade 1 are receiving credit loans at rates in the 4% range. Additionally, due to changes in the COFIX rate, which serves as the benchmark for variable mortgage loan interest rates, the variable rates at the five major domestic banks were adjusted upward from 2.34%?4.13% a month ago to 2.48%?4.24% starting on the 18th.

Already, banks have requested the Financial Supervisory Service to limit credit loan amounts to the borrower’s annual income level. On the 20th, savings banks, mutual finance institutions, insurance companies, and card companies also received requests to restrict credit loan limits within the borrower’s annual income. This move is interpreted as an effort to prevent a ‘balloon effect,’ where those denied credit loans at banks shift to other financial sectors, as banks tighten loan limits amid total household loan volume management.

With the financial sector poised to continue suspending new loans, reducing loan limits, and raising interest rates through the end of the year, the debt repayment burden on existing borrowers is set to increase further.

A bank official stated, "The government’s annual household loan growth target is around 5?6%, but it was managed at 4?5% before COVID-19 and expanded to 9?10% in the first half of this year. As total loan volume management intensifies, banks raise interest rates, which reduces loan limits for borrowers, making partial repayment unavoidable. This atmosphere is expected to spread throughout the financial sector."

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