Monthly Increasing Interest... How to Reduce It? [Seungseop Song's Financial Light]

Finance is difficult. It is filled with confusing terms and complex backstories intertwined. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge must be the foundation. Accordingly, Asia Economy selects one financial term each week and explains it in very simple language. Even if you know nothing about finance, we light the 'fire' of financial understanding with 'light' stories that you can immediately grasp.

[Asia Economy Reporter Song Seungseop] Interest burdens are increasing due to the base interest rate hikes. Major commercial banks have already raised interest rates on credit loans, mortgage loans, and jeonse (long-term deposit) loans. If you need to secure necessary funds through loans, you cannot help but worry about interest. However, depending on the borrower's situation, there are ways to save 'a penny' on interest. How should you deal with expensive interest?

Most people would first think of taking out or refinancing loans with a 'fixed interest rate' method. Variable interest rates typically change every 3 months to 1 year, so fixed interest rates are known to be advantageous during periods of rising interest rates.

However, simply choosing a fixed interest rate can be risky. The loan market does not flow as simply as expected. First, fixed interest rates are higher than variable interest rates. They are at least 0.4 percentage points more expensive, and some products can have a difference of up to 0.7 percentage points. Some experts predict that although interest rates are rising, they will not skyrocket suddenly. If the loan interest rate of the product you use does not rise as much as expected, you may end up losing out. If it is a short-term loan rather than a long-term loan, variable interest rates may still be advantageous, so you should check carefully.

You also need to consider prepayment penalties. Prepayment penalties are a kind of cancellation fee imposed on borrowers who repay their loans before maturity. These vary greatly depending on the type of loan, bank, and product, and you may have to pay a large fee. They are charged based on the remaining period until maturity and the loan balance, typically around 1% of the loan amount.

Therefore, if the prepayment penalty is low, even the same fixed interest rate product offers greater practical benefits. First, you need to check the loan term because prepayment penalties disappear after 3 years. If there is not much time left to reach 3 years, it may be more advantageous to maintain a variable interest rate for a while. In some banks, this period is even shorter. For example, 1-year credit loans may not charge prepayment penalties if repaid 1 to 3 months before maturity. For mortgage loans, switching to a fixed interest rate within the same bank can exempt you from prepayment penalties.

You should actively exercise your right to request an interest rate reduction... Manage your loans in the right order

If you have already taken out a loan, you should actively use your right to request an interest rate reduction. This right allows borrowers to ask the bank to lower interest rates when their financial situation improves. It started voluntarily in the financial sector in 2002 and was legalized in 2019. Both individuals and companies can request it. Financial institutions must notify whether they accept the request within 10 business days. You can also apply via mobile or internet banking.

Hana Bank announced that it will limit the personal credit loan ceiling to "within the range of individual annual income." The photo shows the Hana Bank headquarters branch in Jung-gu, Seoul, on the 27th. Photo by Jinhyung Kang aymsdream@

If you are an office worker, you can request it when you get a job or a promotion that increases your annual income and improves your credit status. It is also possible if your assets increase. For business owners or small business operators, it applies when sales and profits increase or debts decrease. Sometimes, financial institutions proactively lower interest rates for professionals or excellent customers.

However, not all products are eligible. It is only possible when the loan interest rate is calculated through the financial institution's interest rate decision system. Products handled according to predetermined interest rate standards, such as policy fund loans like 햇살론 (Haetsal Loan) or loans secured by savings/deposits, are excluded.

If you are low-income or have low credit, you should develop a habit of using policy financial products. Although the loan screening process may be more complicated than in the private loan market, the interest rates are much cheaper. Moreover, among high-interest refinancing products, some reduce interest burdens if you repay steadily for more than a year. Some products offer an interest reduction effect of 2.5 percentage points per year for 1 to 3-year products.

If you have loans, you can also reduce the loan amount. However, you should not reduce it indiscriminately. You must prioritize your debts and repay them in order of shortest maturity and smallest amount. By industry sector, the usual order is to repay second-tier financial institutions, card loans, commercial bank credit loans, and then mortgage loans.

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