Cash Advance Interest Rates Plummet... Surge in Urgent Loan Demand

The interest rate gap between card loans and others narrows from 5-6%p to 3-4%p
Impact of legal maximum interest rate reduction and tightening of card loans... Concerns over burden on ordinary people

[Asia Economy Reporter Ki Ha-young] This year, the interest rates on cash services (short-term card loans) have dropped by more than 1%, narrowing the interest rate gap with card loans (long-term card loans) to a maximum of 3 percentage points. This is attributed to the combined effect of the legal maximum interest rate reduction and the government's tightening of card loans. There are concerns that as demand for urgent funds shifts to cash services, the interest burden on low-income households will increase.

According to the disclosure by the Credit Finance Association on the 1st, as of the end of September, the average interest rates (operating prices) for cash services based on standard grades at seven major card companies (Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, Hana) ranged from 16.28% to 18.73%. Compared to the end of last year, when rates were between 18.5% and 19.48%, the lower end fell by 2.22 percentage points and the upper end by 0.75 percentage points. The average rate across the seven companies was 17.58%, down 1.36 percentage points from the 18.94% average at the end of December last year.

The biggest factor behind the reduction in cash service interest rates was the legal maximum interest rate cut from 24% to 20% implemented in July. Analysts also suggest a balloon effect occurred, where some demand for urgent funds shifted to cash services as financial authorities tightened regulations on card loans.

In fact, the use of cash services has been increasing this year. According to the Financial Supervisory Service's Financial Statistics Information System, the outstanding balance of cash services at the seven major card companies rose by 4.9% (KRW 255.6 billion), from KRW 5.2178 trillion at the end of last year to KRW 5.4734 trillion at the end of June this year.

As cash service interest rates fell, the gap with card loan rates narrowed from 5?6 percentage points to 3?4 percentage points. As of the end of September, the average interest rate gap between card loans and cash services at the seven major card companies was 4.41 percentage points, down more than 1 percentage point from 5.62 percentage points at the end of last year.

The problem is that even though cash service interest rates have decreased, they remain higher than card loan rates. Even if the interest rate gap between cash services and card loans narrows, from a consumer perspective, it is advantageous to use card loans, which have lower interest rates and longer repayment periods. However, starting next year, card loans will be subject to a total debt service ratio (DSR) of 50%, while cash services will be exempt from regulation, making it highly likely that demand for card loans will shift to cash services, causing a balloon effect.

An industry insider said, "Card loans and cash services can be seen as partial substitutes. If card loan regulations are tightened from next year, low-income individuals needing urgent funds may flock to cash services. Since cash services have higher interest rates than card loans and require immediate repayment, there is concern that the interest burden on low-income households will increase."

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