Loan Interest Rates at 5-7% Become Main Trend... Highest Level in 11 Years

More Than Half of New Loans Are High-Interest
"Is There Anywhere with Cheaper Loans?"
Only Middle-Income Groups See Loan Balances Increase

As the U.S. central bank, the Federal Reserve (Fed), hinted at additional interest rate hikes, attention is increasing on whether the Bank of Korea's Monetary Policy Committee will raise rates at its meeting scheduled for the 25th. The photo shows a loan counter at a commercial bank in downtown Seoul on the 19th. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Sim Nayoung] It has been revealed that half of the new household loans issued by deposit banks in South Korea were concentrated in the 5-7% interest rate range. According to the Bank of Korea's Economic Statistics System on the 8th, as of November last year, loans with interest rates between 5-7% accounted for 48.4% of new loans issued by deposit banks. This is the highest level in about 11 years since February 2012 (52.7%). New loans with high interest rates above 7% accounted for 11.4% of the total.

An official from a commercial bank said, "At the beginning of the new year, the upper limit of mortgage loan interest rates at the five major banks exceeded 8%, and credit loan interest rates are also approaching 8%," adding, "If the Bank of Korea raises the base rate again on the 13th of this month, interest rates are expected to rise further."

As interest rates rise, the ability to respond to loans varies according to income levels. Low-income groups have reduced loan balances because they cannot borrow money, and high-income groups have decreased loan balances by repaying loans to reduce interest burdens. The only group with an increase in average loan balances was the middle-income group.

According to a report titled "Changes in Borrowers' Repayment Ability by Income Level Due to Interest Rate Increases and Implications" released by the Korea Institute of Finance at the end of last month, the average loan balance of low-income borrowers (income first quintile) decreased by 3.64 million KRW (8.8%) from 41.34 million KRW in September 2021 to 37.7 million KRW in September 2022. This was because as market interest rates rose, secondary financial institutions could no longer raise interest rates due to the legal maximum interest rate ceiling and stopped lending, pushing low-income groups into a loan cliff.

High-income groups (income fifth quintile) saw their average loan balance decrease by 0.5%, from 152.76 million KRW to 152 million KRW during the same period. The average loan balances of middle-income borrowers (income second, third, and fourth quintiles) increased by 3.2% (1.46 million KRW), 4.9% (2.72 million KRW), and 4.1% (3.28 million KRW), respectively, compared to a year ago. The report analyzed, "Unlike high-income groups who have the capacity to repay and have responded to increased interest burdens caused by rising interest rates, middle-income groups are experiencing increased repayment burdens due to the interest rate hikes."

Meanwhile, as interest burdens grow, there is also a movement to switch to cheaper interest rates. For those who have taken out mortgage loans, there is high interest in the special Bogeumjari Loan to be introduced by financial authorities in the first quarter. This loan has no income requirements and can be used for home purchase or living stabilization funds. Even if the annual salary is high, if the house price is below 900 million KRW, loans up to 500 million KRW with interest rates in the 4% range are possible.

Additionally, more financial consumers are refinancing their mortgage loans from commercial banks to internet banks with lower interest rates in the 4% range. According to KakaoBank, the amount of mortgage loans refinanced from other banks to KakaoBank (based on contract amount) reached 95.3 billion KRW as of the end of October last year. It was 6.3 billion KRW at the end of March last year, meaning it increased 15-fold in about half a year.

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