"Didn't Expect It to Rise This Much"... Loan Interest Rates Leave People Speechless

Average Interest Rate on New Credit Loans at 5 Major Banks Exceeds 5% in June
Interest Rates Close to 5% Applied Even for Credit Scores in the 900s
Rates Soar to Mid-6% for Scores in the High 800s
Surpassing 7% Expected Soon if Base Rate Rises Further

On the 7th, a scene at a bank counter in Seoul as major commercial banks continue to lower loan interest rates while raising interest rates on regular savings and installment savings products. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Shim Nayoung] "I never dreamed it would rise this much." Office worker Lee Jeong-eun (41, pseudonym) was left speechless when she received a text message from her bank a few days ago about the interest rate recalculation for her 50 million KRW unsecured loan, which she borrowed from a commercial bank last July and whose maturity had arrived. The interest rate, which was 2.97% when she first borrowed, rose to 5.33%. The monthly interest increased from 122,083 KRW to 222,083 KRW, a rise of 100,000 KRW. Lee said, "It’s really becoming a burden now, so I think I need to pay it off quickly," adding, "Currently, my portfolio yields about 300 dollars (approximately 390,000 KRW) in monthly dividends, so I can think of that as covering the interest, but since the amount deducted from my salary is increasing, I plan to repay the loan first when I receive my bonus."

As of last month, the average interest rates on unsecured loans at the five major banks all exceeded 5%. Even those with credit ratings of 1 to 2 (credit scores in the 900s) were subject to interest rates close to 5% when taking out new loans. For those with credit scores in the high 800s, rated 3 to 4, rates soared to the mid-6% range. Following the Bank of Korea’s big step in July (a 0.5 percentage point hike in the base rate at once), the banking sector predicts that if the base rate is raised two or three more times by the end of the year, unsecured loan interest rates could reach the 7% range.

On the 21st, looking at the average unsecured loan interest rates by bank (as of June) disclosed on the Bankers Association Consumer Portal for the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup), Shinhan Bank had the highest rate at 5.46%, followed by KB Kookmin Bank (5.39%), Hana Bank (5.14%), NH Nonghyup (5.05%), and Woori Bank (4.90%).

[Image source=Yonhap News]

Even those with credit ratings of 1 to 2 were subject to interest rates ranging from 4.01% to 4.75% when taking out unsecured loans. Just a year ago, these rates were between 2.56% and 2.85%, so the upper limit has jumped by about 2 percentage points. For those rated 3 to 4, the rates were 3.13% to 4.14% in June last year but rose to between 5.27% and 6.19% in June this year. These figures represent the interest rates on newly issued household loans by banks in the respective months.

The rise in unsecured loan interest rates is somewhat more pronounced compared to mortgage loans. As of June, the average interest rates for mortgage loans (installment repayment method) at the five major banks ranged from 4.04% to 4.78%, which is about 1.5 percentage points higher than the 2.55% to 2.96% range a year ago, but still slightly lower than unsecured loan rates.

A representative from a commercial bank explained, "Basically, mortgage loans are secured loans, so their interest rates are relatively low, whereas unsecured loans are based on credit, so their interest rates are higher. Also, the variable interest rate on mortgage loans is calculated based on the COFIX rate announced monthly, so the rate increases more slowly. In contrast, unsecured loan interest rates are based on the six-month financial bond benchmark rate, which changes daily, so they rise quickly whenever the Bank of Korea raises the base rate."

Unsecured loan interest rates are expected to continue rising. Another bank official said, "If the Bank of Korea raises the base rate about three more times by the end of the year, the average unsecured loan interest rate at the five major banks could exceed 6% and possibly reach the 7% range." As interest rates rise, the total amount of unsecured loans at banks continues to decline. The outstanding balance of household unsecured loans at the five major banks has decreased continuously from January to June this year. It fell by a total of 8.8796 trillion KRW from 139.5575 trillion KRW in December last year to 130.6789 trillion KRW in June this year.

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