Unemployed Individuals Visiting Loan Companies Due to Legal Maximum Interest Rate: What Are the Relief Measures?

"If the Legal Maximum Interest Rate Rises with Market Interest Rates, 1.02 Million Vulnerable Borrowers Can Be Saved"

Report on 'The Necessity of Introducing a Market Interest Rate-Linked Legal Maximum Interest Rate'

[Asia Economy Reporter Sim Nayoung] As the legally capped maximum interest rate fixed at 20% during the period of rising interest rates has been criticized for tightening the financial breathing room of low-credit borrowers, a study has emerged suggesting that switching to a market interest rate-linked maximum legal interest rate system would have a positive impact on financially vulnerable consumers.

"My credit score is 689, and I am unemployed. In the past, I kept borrowing only through card loans, but when I inquired about card loans again this time, I was told I couldn't get a loan because the legal maximum interest rate has been lowered since last year. When I asked a loan company introduced by an acquaintance, they quoted interest rates over 40%, and now I am wondering whether I should borrow money. Some people at the loan company even scare me by saying I shouldn't take out a loan if possible... What should I do?" (Posted on the loan information sharing portal community on the 7th)

As seen in this unemployed person's case, the legally capped maximum interest rate has become a hot issue during the period of rising interest rates. The report titled "The Necessity of Introducing a Market Interest Rate-Linked Legal Maximum Interest Rate," published by the Korea Federation of Credit Finance Associations on the 6th, contains this information. The linked legal maximum interest rate system is a scheme where the legal maximum interest rate level fluctuates according to market interest rates.

The report reflected the current situation where the secondary financial sector's funding cost (the interest rate at which financial companies procure funds for household loans) rose by 3.5 percentage points from the end of last year to November this year (3-year AA+ card bonds 2.37% → 5.87%) and investigated what results would occur if the linked legal maximum interest rate rose from 20% to 23.5%. Under the fixed legal maximum interest rate, about 1.06 million borrowers, accounting for 96.9%, were excluded from the market, but under the linked legal maximum interest rate, 1.02 million borrowers could participate in the loan market.

Changing to a linked legal maximum interest rate system also increases consumer utility. When the funding cost rises by 3.5 percentage points, under the fixed legal maximum interest rate, consumer surplus decreases by about 67,000 to 84,000 KRW per borrower per month, whereas under the linked legal maximum interest rate, it decreases by only 4,000 to 5,000 KRW. The consumer surplus resulting from the system change is calculated as the difference between these two figures, increasing by about 63,000 to 79,000 KRW per borrower per month.

Kim Miru, a research fellow at the Korea Development Institute (KDI) and author of the report, analyzed, "With the base interest rate rising, the funding cost in the credit finance sector rises even faster. When the funding cost rises, households that were paying interest rates close to the legal maximum interest rate are excluded even from card companies and capital companies, which can significantly reduce the welfare of vulnerable groups."

It was also emphasized that households borrowing at the legal maximum interest rate are mainly vulnerable households (those with income in the bottom 20% or below the 2nd income quintile according to the National Tax Service or with credit scores in the bottom 20%) and multiple debtors (those borrowing from three or more financial institutions). According to data from domestic credit rating agencies as of June, among households using low-interest credit loans at 4%, only 8.9% were vulnerable households, whereas among households using high-interest credit loans close to the legal maximum interest rate (18-20%), 84.8% were vulnerable households.

Additionally, about 10.8% of households using low-interest loans below 4% were multiple debtors, while 48.6% of households using high-interest loans close to the legal maximum interest rate were multiple debtors.

The report concluded, "Introducing a linked legal maximum interest rate system that adjusts the legal maximum interest rate in line with the rise in funding costs can significantly alleviate the exclusion of vulnerable borrowers caused by rising funding costs. South Korea should consider using the interest rates of Monetary Stabilization Bonds (1-year) or Treasury Bonds (2-year), which have maturities similar to general credit loans, as benchmark rates for the linked legal maximum interest rate."

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