This Year’s Major Changes in Credit Loans: "Lending Money Based Solely on Repayment Ability"

A bank counter scene in downtown Seoul [Image source=Yonhap News]

[Asia Economy Reporter Kwangho Lee] Starting this year, the conditions for personal credit loans will change. Although the credit loan limits will decrease, products with a maturity of over 5 years that repay principal and interest together are expected to be introduced. The core principle is "lending money according to repayment ability."

◆ Credit loan maturities shorten and principal and interest repayment ratios increase = According to the financial sector on the 2nd, under the financial authorities' strengthened household debt management measures, the maturity of credit loans will shorten and the principal and interest repayment ratio will increase when calculating the Debt Service Ratio (DSR).

DSR refers to the ratio of principal and interest to be repaid within one year divided by the borrower's annual income. When applying DSR at commercial banks, the ratio remains capped at 40%, as before.

Along with this, the DSR ratios applied to secondary financial institutions to prevent loan balloon effects will be significantly reduced. Currently, the average DSR across industries such as insurance, credit cards, and savings banks is about 70?160%, but from this year, it will be reduced to 50?110%.

For credit card companies, the current DSR of 60% will be reduced to 50%, for capital companies from 90% to 65%, and for savings banks from 90% to 65%.

◆ Annual repayment period for credit loans reduced from 7 years to 5 years = In addition, the loan maturity used in DSR calculations will be shortened. Until now, a uniform 7-year period was applied when calculating annual credit loan repayments, but going forward, a period closer to the average maturity of 5 years will be applied.

This is expected to increase the annual credit loan repayment amount compared to before. Of course, some banks may still offer installment repayment products with a 10-year maturity for credit loans.

Moreover, instead of installment repayment for credit loans, products offering benefits such as preferential interest rates or increased limits are expected to be launched.

◆ For overdraft accounts, the entire limit amount is reflected in DSR calculations = Since DSR rises significantly for credit loans, the loan limits available to individuals are expected to decrease.

Additionally, for overdraft accounts, the DSR calculation reflects the entire credit limit amount, not just the amount used.

For example, even if only 10 million KRW is used from a 50 million KRW overdraft account, the DSR calculation will consider the full 50 million KRW as a loan.

◆ Credit management is essential for prospective borrowers = With these regulatory measures tightening the total loan volume on an individual basis, prospective borrowers must make efforts to manage their credit.

If an individual's credit score is high, loan interest rates will be lower, and since interest is also included in the DSR, lower interest rates are advantageous. In other words, as creditworthiness improves, interest rates decrease, enabling transactions under more favorable loan conditions.

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