Loan Interest Rates Surge... Late Explanation from the Financial Services Commission (Comprehensive)

Impact of Reference Interest Rate Increase, Not Household Debt Total Limit
'Claims of Financial Market Distortion' Considered Excessive

[Asia Economy Reporter Lee Kwang-ho] Financial authorities recently drew a clear line, stating that the sharp rise in loan interest rates at commercial banks is not due to the total household debt limit. They also consider the criticism that distortions are occurring in the financial market to be excessive. The authorities foresee that the current trend may continue for the time being.

On the 18th, the Financial Services Commission announced in an explanatory document titled 'Recent Increase in Loan Interest Rates' that loan interest rates, which had dropped to historically low levels during the COVID-19 pandemic, have risen significantly in the second half of this year.

According to statistics from the Bank of Korea, from the end of June to the end of September this year, the interest rate on unsecured loans handled by banks increased from 3.75% to 4.15%, and mortgage loan rates rose from 2.74% to 3.01%, marking increases of 0.40 percentage points and 0.27 percentage points respectively. Based on loan handling data from major commercial banks, it is estimated that the rate of increase was even greater last month.

The financial authorities judged that this rise in loan interest rates was largely influenced by the increase in benchmark interest rates that serve as the basis for various loans. They interpret that the interest rates on government bonds and bank bonds, which are loan benchmark rates, have risen sharply since the second half of the year due to global synchronized tightening and concerns over base rate hikes.

In particular, the interest rate increase in October is seen as an inevitable phenomenon occurring as the global credit expansion ends and the full-scale interest rate hike phase begins. It is expected that this trend may continue for some time depending on the development of domestic and international policies and market conditions.

Financial Authorities Late to Address Consumer Outcry Over Soaring Loan Interest Rates

However, the authorities explained that criticisms such as mortgage loan rates being higher than unsecured loan rates or the interest rate increase for high-credit borrowers surpassing that of low-credit borrowers do not accurately reflect reality.

Regarding the claim that mortgage loan rates are higher than unsecured loan rates, they stated that the mortgage loan rate used for comparison was the upper limit rate for a long-term (35-year) mortgage loan product for credit grade 3. Comparing this directly with the upper limit rate of unsecured loans, which are mainly short-term (1-year) and for credit grade 1, is inappropriate.

As for the claim that the interest rate increase for high-credit borrowers is higher than for low-credit borrowers, they countered that this is limited to internet-only banks. Internet banks, which have expanded business targeting high-credit borrowers at low rates, are seen as normalizing operations to align with their founding purpose of expanding loans to medium- and low-credit borrowers.

They also raised their voices against the criticism that installment repayment jeonse loans increase living costs and hinder wealth formation. They argued that installment repayment has the same effect as subscribing to a high-interest, tax-exempt savings account with a 2-year maturity, and this can actually be a great help to those who aim to repay jeonse loans and build wealth through savings during a period of rising interest rates.

Seung-beom Ko, Chairman of the Financial Services Commission

Ko Seung-beom, Chairman of the Financial Services Commission, also explained to reporters after a meeting with the specialized credit finance industry the previous day that the recent rise in loan interest rates is due to "a significant increase in loan benchmark interest rates," and that "compared to this, the impact of additional and preferential interest rates is relatively small."

He added, "The reason loan benchmark interest rates have risen is related to the increase in market interest rates and the Bank of Korea's base rate hikes," diagnosing that "market interest rates have risen significantly worldwide as monetary policies normalize."

He further noted, "Compared to other countries, South Korea's household credit ratio growth rate is among the highest in the world," adding, "Even compared to the United States, South Korea's household credit ratio has continued to rise to 105%, while the U.S. level has decreased to around 77%."

A Financial Services Commission official stated, "The recent upward trend in interest rates is seen as a phenomenon occurring during the transition from credit expansion to credit contraction," emphasizing, "Together with the Financial Supervisory Service, we will continue to closely monitor potential risks during the interest rate hike period and the trends of market deposit and loan interest rates."

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