"Loan Suspension Possible for Low-Credit Borrowers Amid Rising Interest Rates... Legal Maximum Interest Rate Needs Flexibility"

Financial Research Institute "Need to Establish Maximum Interest Rate Guidelines"

[Image source=Yonhap News]

[Asia Economy Reporter Seo So-jung] As market interest rates rise, the exclusion of vulnerable borrowers from private finance may expand, prompting calls for the government to consider more flexible management of the current statutory maximum interest rate of 20%.

On the 13th, Oh Tae-rok, a research fellow at the Korea Institute of Finance, stated in his report titled "A Study on the Appropriate Level of Interest Rate Environment and Household Loan Interest Rate Ceiling" that "Factors such as increased uncertainty due to the US-Russia conflict, inflation concerns caused by supply chain disruptions, and expectations of rising US interest rates are driving up market interest rates in South Korea," adding, "During periods of rising market interest rates, an increase in the cost of credit loans is inevitable."

According to the report, estimating the average cost interest rates of credit loans from secondary financial institutions such as savings banks, credit card companies, and capital companies targeting low-credit borrowers, the cost interest rates are projected to rise to approximately 21.6?24.1% and 23.1?26.9% at market interest rates of 1.5% and 2%, respectively.

Research fellow Oh explained, "If the average cost interest rate for loan operations is set at 19%, even after lowering the statutory maximum interest rate from 24% to 20%, loans can still be supplied up to 20%. However, if the cost interest rate is expected to be 21%, it becomes impossible to make a profit, leading to a suspension of loan supply to low-credit borrowers."

He continued, "The level of cost interest rates relative to the statutory maximum interest rate acts as a key factor in determining whether lenders continue or cease business, especially targeting low-credit borrowers," adding, "If more lenders stop providing loans, the exclusion of low-credit groups from private finance will intensify."

The statutory maximum interest rate under the Loan Business Act was first introduced at 66% in October 2002 and has since been reduced through 49% (2007), 44% (2010), 39% (2011), 34.9% (2014), 27.9% (March 2016), 24% (February 2018), reaching 20% in July 2021.

Research fellow Oh emphasized, "If a full-fledged period of rising interest rates arrives in the future, the impact of the maximum interest rate on the exclusion of vulnerable borrowers from private finance may differ from the recent decade-long period of declining rates, so preparation is necessary."

He added, "Some countries such as France, Germany, and Italy do not legally specify fixed interest rates but instead have their central banks apply a variable maximum interest rate based on multiples of the average interest rates of similar loan products according to loan type, amount, and duration, reflecting market conditions," and suggested, "It is necessary to consider establishing guidelines for appropriate maximum interest rate levels that reduce the burden on vulnerable borrowers while minimizing exclusion of certain groups, or to codify the maximum interest rate in linkage with economic conditions."

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