Small Business Owners with Over 7% High-Interest Loans Switch to Bank Loans with Up to 6.5% Interest Rates

[Asia Economy Reporter Song Hwajeong] The financial authorities will implement a refinancing program for self-employed individuals and small business owners, aimed at alleviating their repayment burdens by refinancing existing high-interest loans into low-interest loans and supporting long-term installment repayments. This program, worth 8.5 trillion KRW, will be in effect until the end of next year. As a result, self-employed individuals and small business owners affected by COVID-19 will be able to refinance high-interest loans with rates above 7% into loans with a maximum interest rate of 6.5% based on banking sector standards, which is expected to reduce the burden of rising interest rates.

On the 10th, the Financial Services Commission announced the 8.5 trillion KRW low-interest refinancing program.

High-interest business loans above 7% for self-employed and small business owners affected by COVID-19 are eligible for refinancing

Under this program, individual business owners can refinance one or more high-interest loans up to a limit of 50 million KRW, and corporate small businesses up to 100 million KRW. The repayment period is a total of 5 years, with a 2-year grace period followed by 3 years of installment repayments. The interest rate and guarantee fee borne by self-employed individuals and small business owners using the refinancing program will be capped at a maximum of 6.5% based on banking sector standards, with the actual rate applied varying according to the borrower's creditworthiness. The interest rate will be fixed at a maximum of 5.5% for the first 2 years based on banking sector standards, and for years 3 to 5, the agreed rate (bank bond AAA 1-year + 2.0 percentage points) will be applied as the interest rate ceiling. The guarantee fee is fixed at 1% per annum.

The support targets are normal borrowers who have been affected by COVID-19 and are individual business owners or corporate small business owners/small enterprises. Eligible borrowers include those who have received disaster relief funds such as loss compensation or disaster support payments, or those who have received maturity extensions or repayment deferrals from financial institutions as of the end of June this year. Additionally, individual business owners and corporate small business owners/small enterprises who are currently conducting normal business activities and can repay the low-interest refinancing funds may apply. Those who are temporarily closed, permanently closed, delinquent on national or local taxes, or have overdue loans with financial institutions are considered unlikely to be normal borrowers based on repayment ability and will be supported through the Fresh Start Fund. Industries that are difficult to consider as COVID-19 affected, such as gambling and entertainment-related businesses, nightlife establishments, real estate leasing/sales, finance, legal, accounting, tax, and healthcare sectors excluded from small business policy funds, are also excluded from the support targets.

This program supports cases where the interest rate on business loans such as facility and working capital loans received from financial institutions is 7% at the time of refinancing application. Financial institution loans include business credit and secured loans handled by banks, savings banks, specialized credit finance companies (card companies, capital companies), mutual finance institutions (credit unions, NongHyup, Suhyup, Forestry Cooperatives, Saemaeul Geumgo), and insurance companies. Considering the purpose of supporting businesses affected by COVID-19, loans issued until the end of May this year are eligible. Loans received before the end of May that were renewed after June are also eligible. Loans that are difficult to classify as business loans or are inappropriate for refinancing due to their nature are excluded. These include residential or rental real estate loans, personal-use automobile purchases, stock loans, and overdraft accounts.

High-interest non-bank loans can also be refinanced into bank loans

This refinancing program can be applied for at banks, and the Financial Services Commission plans to allow some non-bank lending institutions to participate in the refinancing program. Banks can accept refinancing applications for high-interest loans previously received from non-bank institutions as well as high-interest loans received from the bank itself (own customers) and other banks. Participation has been confirmed from 14 banks including Kookmin, Industrial Bank of Korea, Shinhan, Woori, Hana, NongHyup, Suhyup, SC, Busan, Kyongnam, Daegu, Gwangju, Jeonbuk, and Jeju banks. Internet-only banks, which have not handled credit guarantees from the Korea Credit Guarantee Fund (KODIT) so far, will finalize their participation by September after related consultations. Furthermore, considering customer choice and fairness among institutions, refinancing programs for own customers will also be allowed for non-bank lending institutions, with actual participation decided autonomously by each institution.

The Financial Services Commission plans to provide an online refinancing program platform (KODIT) and offline counters to verify eligibility and refinancing target loans. Eligible self-employed individuals and small business owners can apply for the refinancing program through banks and some non-bank institutions starting from the end of September.

The refinancing program will be funded by 680 billion KRW in government contributions to the KODIT fund, prepared through the supplementary budget in May. Implementation and refinancing will begin at the end of September, with applications accepted until the end of next year.

A Financial Services Commission official stated, "All financial institutions participating in the refinancing program, along with related agencies such as KODIT and the Korea Inclusive Finance Agency, are currently organizing and upgrading their IT systems to build a platform for eligibility verification, application processing, refinancing handling, and guidance." He added, "In September, a comprehensive business agreement covering the detailed processing procedures for the refinancing program will be signed across the entire financial sector, and related regulations will be revised and prepared."

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