[Practical Finance] 'Interest Rate Dieter' Saving 4 Million Won Annually in Interest with Ontu Business

P2P Lending Firms Targeting High-Interest 2nd Financial Customers
Industry Loan Balance Reaches 1.3 Trillion Won at Low Interest Rates
Average Interest Rate Reduced by 4.5%, Interest Decreased by 2.71 Million Won

From Investor Perspective, Medium-Risk Medium-Return Investment
Yield: 6-10% for Collateral, 7-12% for Credit
Risk Significantly Drops with Small and Diversified Investments

Mr. Choi Young-jun (in his 40s, pseudonym), residing in Yeongdeungpo-gu, Seoul, has invested in 1,133 apartment mortgage loan products through PeopleFund since 2019. The average amount he lent per product was 10,000 KRW. Once his total investment exceeded 5 million KRW, his cumulative pre-tax return rate began to maintain a low double-digit figure in the early 10% range. Mr. Choi explained, "The interest income I receive is also reinvested, so the compound interest effect has grown over time."

Mr. Kim Jin-hyuk (in his 30s, pseudonym), who works at a small-to-medium enterprise in Chungbuk, borrowed 40 million KRW from the secondary financial sector in the past to cover his parents' hospital bills. Burdened with interest rates close to the maximum in the secondary financial sector, Mr. Kim recently refinanced 30 million KRW through 8 Percent at an interest rate of 8.9%. Through this, he succeeded in reducing his annual interest burden by nearly 4 million KRW.

Online investment finance businesses (OnTu businesses) are gaining attention as alternative loan and investment options during the interest rate hike period. From the perspective of medium-credit borrowers, OnTu companies offer lower interest rates or higher loan limits than the secondary financial sector, allowing them to borrow money under better conditions. Investors can also diversify their income sources through medium-risk, medium-return alternative investments.

Secondary Financial Borrowers Applying for Refinancing Loans at Low Interest Rates

According to the financial sector on the 21st, the loan balance of the OnTu industry was recorded at 1.3983 trillion KRW. This is a 25.4% (283.3 billion KRW) increase from 1.115 trillion KRW at the end of last year. The upward trend in cumulative loan amounts is even steeper. During the same period, it jumped 77.7% (1.9458 trillion KRW) from 2.5039 trillion KRW to 4.4497 trillion KRW. This contrasts with commercial banks, whose growth slowed due to household loan regulations and interest rate hikes.

The reason for the significant increase in the OnTu industry's loan scale is the lower interest rates compared to the secondary financial sector. OnTu companies position themselves as 1.5 financial institutions and adopt a strategy of aggressively attracting high-interest customers from savings banks or card companies. 8 Percent has an average loan amount of 11.4 million KRW with an average interest rate around 13%. Because this is cheaper than the secondary financial sector loan rates, refinancing purposes account for 43% of the 257 billion KRW in personal credit loans.

PeopleFund also reported that borrowers with refinancing loan purposes accounted for 56.1% of all personal credit loan customers. Customers who succeeded in refinancing received interest rates 4.5 percentage points lower on average and loan limits increased by 12.55 million KRW. Through this, borrowers saved an average of 2.71 million KRW in interest (average holding period of 45 months, equal principal and interest repayment method).

The reason low loan interest rates were possible is thanks to credit scoring system (CSS) technology. It uses everyday life information that institutional financial companies did not consider to precisely assess the borrower's creditworthiness. For example, Lendit uses its own developed CSS called ‘LSS’ when handling personal credit loans, comprehensively reviewing seven years of mid-interest loans and repayment data. 8 Percent utilizes 500 pieces of information per bond, and PeopleFund has established an AI (artificial intelligence) research center to advance its CSS.

6~12% Returns... Reducing Principal Loss Risk through Diversified Investment

As the number of financial consumers seeking loans increases, the OnTu industry is also emerging in the investment market. Typically, the expected returns in the OnTu industry are 6~10% annually for secured investments and 7~12% for personal credit bonds. Individual investors simply need to evaluate the borrower's credit, income, collateral status, and seniority/subordination, then lend as much as they want. If they want to increase stability, they can build a portfolio focusing on high-quality borrowers; if they want to improve returns, they can focus on low-credit borrowers.

OnTu industry insiders advise that investors must always diversify their funds into small amounts. Increasing the number of bonds lowers the risk rate. According to Lendit's internal data from last year, the probability of principal loss is 18.55% when investing in 1 to 100 bonds. However, when the number of bonds increases to 101 to 200, the probability drops sharply to 5.7%, and if it exceeds 300 bonds, it further decreases to 0.52%.

This also allows for tax-saving effects. Income earned from investing in OnTu is subject to a 15.4% tax, which includes 14% interest income tax and 1.4% local income tax. Taxes are withheld at the source and deducted when principal and interest are paid, without separate tax payments. Withholding starts from units of 10 KRW, and amounts under 1 KRW are exempt. This means lending 10,000 KRW each to 1,000 people is much more advantageous tax-wise than lending 10 million KRW to one person.

There are also precautions to consider when investing. Before investing in OnTu, it is essential to confirm whether the company is included in the institutional financial sector, and to keep in mind that deposits are not protected, so a total loss is possible. Unlike fixed deposits or stock products, investors cannot withdraw early at will, so it is advisable to invest only after careful consideration and with surplus funds. During the investment process, it is also necessary to comprehensively consider repayment priority, repayment sources, maturity, and product stability.

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