Tears of Self-Employed... Interest Burden Soars as Loan Interest Rates 'Slightly' Rise (Comprehensive)

Self-Employed Face 5.8 Trillion KRW Increase in Interest Burden with 1% Rise in Loan Rates
Expected Interest Burden Grows Steadily with Rate Changes
Average Loan Rate at 5 Major Banks Rises from 2.78% to 3.37%
Concerns Over Chain Bankruptcies if Rates Rise and Interest Deferrals End

Officials from the Korea Federation of Self-Employed are urging for practical compensation near the National Assembly in Yeouido, Seoul. Photo by Moon Honam munonam@

As loan interest rates begin to rise in earnest, it has been revealed that self-employed individuals have shouldered nearly 3 trillion won in additional interest in the second half of this year. With the Bank of Korea's base rate hike scheduled for the 25th, the upward trend in loan interest rates is inevitable, and the interest burden on sole proprietors is expected to intensify further. There are warnings that small and medium-sized enterprises (SMEs), whose basic financial strength is already depleted due to tightened loan regulations and soaring interest rates, could collapse rapidly.

Interest rises by 5.2 trillion won for every 1%p increase in rates

According to data submitted by the Bank of Korea to Yoon Doo-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, as of the first half of this year, a 1 percentage point increase in loan interest rates is estimated to increase interest burdens by 5.8 trillion won. A 0.50 percentage point rise would increase interest burdens by 2.9 trillion won, and a 0.25 percentage point rise would add 1.5 trillion won. The data was calculated by identifying borrowers with sole proprietor loans using the Bank of Korea's household debt database. The total loan amount held by self-employed individuals, combining household and business loans, was estimated at approximately 858.4 trillion won in the first half of the year.

The expected increase in interest burden due to interest rate changes has been on the rise. In the third quarter of last year, a 1 percentage point hike in rates increased interest burdens by about 5.2 trillion won. However, as market interest rates rose this year, the figure expanded to 5.6 trillion won in the first quarter and increased by another 200 billion won in the second quarter compared to the previous quarter.

This is analyzed as being due to self-employed individuals, who were hit hard by COVID-19, taking on additional debt to survive despite the start of the rate hike period. Notably, many of them opted for variable-rate loans. According to the Bank of Korea, the proportion of variable-rate loans among self-employed borrowers is estimated at about 67.9%. Although this is lower than the 74.9% variable-rate proportion in household loans, considering that the exact proportions by industry and sector are not fully reflected, many interpret that the actual impact of rate hikes is even greater.

Related loan interest rates rise 0.59%p in just four months

The problem is that loan interest rates for self-employed individuals are expected to continue rising. The average interest rate on personal business loans from the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 2.78% in the first half of the year. However, last month, the average rate rose by 0.59 percentage points to 3.37%. Assuming similar growth rates in other sectors, self-employed individuals have ended up paying nearly 3 trillion won in additional interest in just four months.

Nevertheless, the outstanding balance of personal business (SOHO) loans held by the five major banks reached a record high of 297.5334 trillion won since statistics began. It increased by 23.5181 trillion won this year alone, and compared to the end of 2019 before COVID-19 (239.4193 trillion won), it has grown by a staggering 58.1141 trillion won. This is interpreted as meaning that more self-employed individuals have relied on debt to endure the sales impact caused by COVID-19.

The problem worsened as COVID-19 re-entered a resurgence phase in July, further deteriorating the business environment for the self-employed. With financial authorities tightening loans and first-tier financial institutions (banks) closing their doors, many turned to second-tier financial institutions (such as savings banks, credit card companies, and capital firms). Recently, the Korea Development Institute (KDI) highlighted the reality of self-employed individuals suffering from the double burden of rising interest rates and tightened loans in its report titled "Diagnosis of the Risks of Self-Employed Debt and Policy Directions."

Researcher Oh Yoon-hae of KDI analyzed 4.44 million sole proprietors holding household or business loans based on credit rating agency data. Since the onset of COVID-19, the growth rate of household loans held by sole proprietors has declined in the banking sector but continued to rise in the non-bank sector. Especially since the first quarter of this year, the growth rate of household loans for sole proprietors has significantly increased in savings banks, credit card companies, and capital firms.

Business loans also rose in high-interest sectors. Particularly, self-employed individuals with lower income or credit scores experienced faster interest rate hikes. During the same period, the average interest rate on personal business loans for borrowers with credit ratings 1 to 3 increased by only 0.54 percentage points, from 2.3% to 2.93%. In contrast, borrowers with a credit rating of 6 saw their loan interest rates rise from 6.70% to 7.69%, an increase of 0.98 percentage points. This roughly twice as fast increase indicates a heavier interest burden on vulnerable groups.

Warning signs for self-employed as loan maturity extensions and repayment deferrals end

The problem is that while interest burdens grow heavier, the expiration of COVID-19 loan maturity extensions and interest deferrals is approaching in March next year. Since the Bank of Korea raised the base rate by 0.25 percentage points in August, loan interest rates have shown a steep upward trend. Some banks already have average personal business loan interest rates reaching 5%.

As interest rates rise, the interest burden on self-employed individuals inevitably increases. According to the Bank of Korea's estimates, a 0.5% increase in the base rate would raise the annual interest burden on self-employed individuals by about 2.9 trillion won. When COVID-19-related financial support measures such as loan maturity extensions and interest repayment deferrals end at the end of March next year, the difficulties faced by self-employed individuals are expected to worsen. As of the end of October, 2,495 companies applied for interest deferrals at the five major banks, with the deferred interest amounting to 32.6 billion won. Considering that there were 1,724 companies and 20.2 billion won in the first quarter of this year, the number of companies at risk is gradually increasing.

Experts point out that long-term efforts to restructure the self-employed market are necessary, rather than temporary measures such as reducing or partially forgiving debt burdens. Professor Kim Sang-bong of Hansung University's Department of Economics emphasized, "Short-term methods like debt forgiveness or financial support do not help solve the fundamental problem. It is crucial to adjust the market structure by curbing indiscriminate entry into the self-employed market and allowing natural exits from the market."

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