"Loan Interest Burden Soars"… 2% Loans Plummet, 4% Loans Surge

Base Interest Rate Rises, Household Loan Interest Rates Increase
Borrowers' Interest Burden Significantly Grows
Loans at 4% Annual Rate Reach Highest in 8 Years and 1 Month

[Asia Economy Reporter Sim Nayoung] Among household loan borrowers in South Korea, those who borrowed at an annual interest rate in the 2% range have plummeted vertically within a year, while those who borrowed at the 4% range have surged sharply. This is because household loan interest rates have soared due to the rise in the base interest rate since the second half of last year. Borrowers' interest burdens have also increased accordingly. Economic experts expressed concerns that with the new government's policy to ease loan regulations, the increase in household loans is likely to reignite, and if loan interest rates rise further, the risks could grow.

According to the "Proportion of Household Loans by Deposit Bank Interest Rate Level" (based on new loan amounts) in the Bank of Korea's economic statistics system as of January, the proportion of borrowers with loans in the 4-5% range was 27.7%. This is the highest record in 8 years and 1 month since December 2013 (28.6%). It also jumped significantly compared to a year ago (2.8%). A financial sector official said, "With the rise in interest rates, both unsecured loans and mortgage loan interest rates have increased, resulting in more high-interest borrowers." Borrowers with loans in the 3-4% range also increased from 13.4% to 45.3%.

The proportion of low-interest borrowers shrank. In January last year, the proportion of borrowers with interest rates below 3% was overwhelmingly 80.3%, but it dropped to 18.8% within a year. Looking more closely at this range: ▲ below 2% interest rate fell from 9.6% to 1.3%, ▲ 2% to below 2.5% fell from 26.2% to 7.5%, ▲ 2.5% to below 3% fell from 44.5% to 10.0%.

The loan situation for small and medium-sized enterprises (SMEs), including small business owners, is no different. Due to difficulties in management caused by COVID-19, they took out loans, but with interest increasing, their burden is growing. Looking at the proportion of SME borrowers by deposit interest rate, those below 3% decreased (67.0% → 26.3%), while those in the 3-4% range (23.5% → 52.0%) and 4-5% range (6.7% → 16.3%) increased.

What economic experts worry about is that easing household loan regulations during a period of rising interest rates could cause a significant shock to the domestic economy. President-elect Yoon has pledged to raise the loan-to-value ratio (LTV) to 70% overall and up to 80% for first-time homebuyers. To this end, the Financial Services Commission is expected to abolish the total household loan volume regulation applied to banks and also ease the debt service ratio (DSR), which determines loan amounts based on individual income.

Professor Kim Sangbong of Hansung University’s Department of Economics said, "If interest rates rise further, borrowers' interest burdens will grow like a snowball, and easing household loans could cause serious side effects." He added, "Housing supply policies should be presented together to lower housing prices while easing loan regulations to prevent a sharp increase in household loans." Kang Jonggu, a research advisory committee member of the Bank of Korea, also said, "If the economy worsens in the future, asset prices will fall and incomes will decrease, making it difficult to repay principal and interest on household loans, which could negatively impact the economy. Therefore, managing risks is important."

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