Regulations and Interest Rates Rising... Is the Emergency Loan Window 'Card Loan' Also Closing for Vulnerable Groups?

Rapid Increase in Card Loans Leads to Successive Interest Rate Hikes
Loan Access Narrows Further for Low-Credit Borrowers

[Asia Economy Reporter Kim Hyo-jin] Card loans, mainly used by middle- and low-credit borrowers who have no other place to borrow money, have surged this year. As the financial authorities' household loan regulations raised the bar for bank loans, not only middle- and low-credit borrowers but also high-credit borrowers appear to have mobilized emergency funds through card loans.

However, with the tightening of household loans expected to spread comprehensively to the secondary financial sector and card companies simultaneously raising card loan interest rates to block the balloon effect, concerns are being raised that defaults may increase, especially among vulnerable borrowers.

According to the financial sector on the 1st, the average interest rate (operating price) of card loans based on the standard grade at seven full-service card companies including Shinhan, Samsung, Kookmin, Hyundai, Lotte, Hana, and Woori was recorded at 12.66?13.96% at the end of last month. The average was 13.1%, up 0.15 percentage points from the previous month (12.95%).

A financial sector official explained, "This can be seen as an effort to suppress the 'balloon effect' where loan demand shifts to the secondary financial sector due to continued bank loan regulations."

According to data received by Kim Han-jung, a member of the Democratic Party of Korea, from the Financial Supervisory Service, the card loan balance of five card companies including Shinhan, Samsung, KB Kookmin, Hyundai, and Lotte stood at 27.9181 trillion won at the end of June, an increase of about 15% (3.6456 trillion won) compared to the same period last year.

The card loan balance of seven card companies in the first quarter of this year also increased by 9.5% (2.874 trillion won) to 33.1788 trillion won compared to the same period last year.

Card loans are high-interest products mainly used by financially vulnerable groups such as low-credit borrowers who find bank loans relatively difficult to obtain. The increase in card loan balances means that the demand for emergency funds among the lower-income class has increased significantly due to the impact of COVID-19 and other factors, and their access to bank loans has decreased.

In this situation, since card loan interest rates have been raised, it can be interpreted that the financial channels for vulnerable groups have become even narrower. It is expected that card loan interest rates will continue to rise for the time being.

Because the risk of default is greater than that of bank loans due to the high interest rates, the financial authorities, who have rolled up their sleeves to manage total loan volume, may strengthen their management further.

Interest Rates May Rise Further Under Authorities' Management

A card industry official said, "Considering the authorities' policies and the loan increase trend in the first half of the year comprehensively, we have no choice but to strengthen monitoring," adding, "It seems this trend will continue until the end of this year."

Since many card loan users are multiple debtors, there are also concerns that more sensitive management is inevitable in line with base rate hikes. This is because the possibility of loan defaults is high due to borrowers' weakened repayment ability. Accordingly, some card companies are also conducting system work to implement measures such as reducing loan limits to within the borrower's annual income.

An industry insider said, "In addition to existing demand, the demand from young people for 'debt investment (borrowing to invest in stocks)' and 'Yeongkkeul (pulling together all resources to buy a home)' seems to have increased attention on card loans."

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