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In a report titled “Characteristics and Implications of Marginal Households with Household Debt” the Hyundai Research Institute reported that there are 1.58 million “marginal households” in South Korea that are having trouble paying off their debts.

“Marginal households” refer to those with a debt service ratio (DSR) above 40%. Debt service ratio is the ratio of debt to disposable income.

The report analyzed data from Statistics Korea’s survey of household finance and welfare to conclude that the number of marginal households had increased from 1.32 million in 2012 to 1.58 million in 2015, or by 258,000 (19.5%) in three years.

The percentage of households with financial debt that are marginal households also increased over the same period from 12.3% to 14.8%. The total amount of household debt during this period ballooned from 964 trillion won (US$82.69 billion) to 1.21 quadrillion won.

Marginal households are a frequent phenomenon among the elderly, low-income earners and the self-employed. They account for 17.5% of households in which the householder is 60 years old or above, 18.7% in which the householder does not have a job, 22.9% in which the householder is in the lowest income quintile (bottom 20%) and 20.4% in which the householder is self-employed with employees under him or her.

The average debt service ratio of marginal households is 104.7% - calculated by dividing the interest on the principle (41.60 million won) by disposable income (39.73 million won) - which means that these households’ income is not sufficient to pay back the principle.

With an average financial debt of 150.43 million won, it is estimated that it would take these families 3.8 years to pay back their debt even if they devoted all their disposable income to that purpose.

For the average non-marginal family (with financial debt of 63.01 million won and disposable income of 48.44 million won), this is estimated to take 1.3 years.

Another reason for the deteriorating quality of household debt is that, while household loans from banks increased by an average of 6.5% per year over the past three years (from 467 trillion won to 564 trillion won), loans at non-banking financial institutions jumped by 9.6% (from 439 trillion won to 578 trillion won).

Considering the sharp increase in debt, the authors of the report think it is very likely that large numbers of households will become marginal when the time comes for them to start paying back the principal on their loans.

“Marginal households need to be monitored, and measures should be taken to improve their ability to pay back their loans,” the report said.

By Lee Bon-young, staff reporter

Please direct questions or comments to [english@hani.co.kr]