Debt-Fueled Bit-tu and Yeong-kkeul Borrowers Face Triple Hardships: Loan Suspension, Limit Reduction, and Interest Rate Hikes (Comprehensive)

Loan Limit Reduction and Interest Rate Hike Cause Uproar

[Asia Economy Reporter Sunmi Park] "This month, the interest rate on credit loans, which was 1.9% at the time of extension, has risen to 2.9%. I was told to repay 10 million won of principal even though I had no income due to parental leave, so I paid it back. I took out a 'Yeongkkeul' (borrowing to the limit) loan when buying a 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 was already difficult, and now that interest rates are expected to keep rising, I am worried."

Riding the social trend of borrowing to invest, many borrowers who have been drawing on bank loans are increasingly complaining about difficulties due to the financial authorities' strengthened household loan management, which has led to reduced loan limits and interest rate hikes. After major banks applied both loan limit reductions and interest rate increases as part of managing the total volume of household loans, this atmosphere is spreading throughout the financial sector, putting existing borrowers at risk of facing greater debt repayment burdens.

According to the Bankers Association on the 23rd, the average interest rates for credit loans handled in July by the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?were between 3.03% and 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 ranging from 2.65% to 3.11%, up 0.41 percentage points on 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, there are cases 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, from the 18th, the variable mortgage loan rates at the five major domestic banks were adjusted upward to between 2.48% and 4.24%, compared to 2.34% to 4.13% a month earlier.

Following the banks' request to the Financial Supervisory Service to limit credit loan amounts to the borrower's annual salary, 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 is interpreted as a measure to block the 'balloon effect,' where those rejected for credit loans at banks move to other financial sectors, as banks begin to reduce loan limits amid total household loan volume management.

With the financial sector's suspension of new loans, reduction of loan limits, and interest rate hikes expected to continue through the end of the year, the debt repayment burden on existing borrowers is set to increase further.

An official from a bank 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, if banks raise interest rates, borrowers will face reduced loan limits, making partial repayment inevitable. This atmosphere is expected to spread throughout the financial sector."

SK Securities analyst Won-tae Yoon also commented on the banks' loan suspension declarations, saying, "For customers planning or intending to execute loans, if some banks stop lending, they will have no choice but to consider other banks. If other banks maintain the current household loan growth rate, they are expected to exhaust their loan limits by the third quarter of this year."

However, the financial authorities view the concerns about a 'domino effect of loan suspensions' due to the suspension of household loan handling by banks such as Nonghyup Bank as "very unlikely."

They explained that most financial institutions, including major commercial banks, still have ample room to meet their household loan handling targets. Only Nonghyup Bank and the Nonghyup Federation exceeded their household loan handling targets significantly as of the end of July, and the suspension was implemented because it was judged impossible to comply with the annual target without a temporary halt.

A Financial Services Commission official said, "We will closely monitor whether the suspension of loan handling by some banks, including Nonghyup Bank, causes inconvenience to financial consumers."

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