hankyoreh

A person walks by a sign advertising home loans outside a bank in Seoul on Aug. 25. (Yonhap News)

“Valued customer, the interest rate for your loan was adjusted to 6.27% on Aug. 24.”

Text messages like this make 40-year-old office worker Han’s heart sink in panic these days. Early in the year, Han took out a credit loan worth 90 million won (US$67,600) at a 4.2% interest rate, which has shot up by 2 percentage points in the past eight months. He also took out a 240-million-won loan to fund his jeonse key money last year, and the loan’s interest rate has jumped from 3.2% to 5.8% in the past year.

“I used to pay about 800,000 won every month on interest payments, but recently that amount has increased to as much as 1.4 million won,” Han told the Hankyoreh on Thursday.

Debt is posing an increasingly heavy burden on borrowers in South Korea, the standard interest rate in the country having jumped from 0.50% to 2.50% in the span of a year.

Households as a whole are projected to spend an additional 26.4 trillion won (US$19.8 billion) in yearly interest payments compared to what they spent prior to August of last year, when the Bank of Korea’s Monetary Policy Committee kickstarted its standard interest rate hikes. Small business owners as a whole will also face an additional 12.8 trillion won in yearly interest payments.

As of Thursday, the Bank of Korea (BOK) has raised the standard interest rate by a cumulative total of 2 percentage points since August of last year. According to the BOK, a 0.25-percentage-point increase in the standard interest rate leads to an additional 3.3 trillion won in yearly interest payments for households as a whole, as well as an additional 163,000 won in yearly interest payments for average car owners. Compared to July of last year, average car owners will owe 1.304 million won more in yearly interest payments.

The floating interest rate for mortgage loans from the top five South Korean banks (KB Kookmin Bank, Shinhan Bank, KEB Hana Bank, Woori Bank, Nonghyup Bank) was 6.11% on the top end on Thursday. After the BOK indicated another standard interest rate hike, the financial world believes chances are high that the top-end yearly interest rate for mortgage loans may hit 7% by the end of this year. Interest rates for credit loans, which tie in with market interest rates for financial bonds, were around 4.50% to 5.80% a year at four top South Korean banks (KB Kookmin Bank, Shinhan Bank, KEB Hana Bank, Woori Bank) on the same day, on the verge of hitting the 6% range.

The average debt total for small business owners was tallied at 350 million won in the third quarter of last year, almost four times that for non-small business owners (90 million won). The BOK estimates that a 0.25-percentage-point increase in the standard interest rate causes small business owners as a whole to face an additional 1.6 trillion won in yearly interest payments. In other words, small business owners owe 12.8 trillion won more in yearly interest payments due to the standard interest hikes of the past year.

Not only do small business owners have a lot of debt, but they have low-quality debt. In the past two and a half years (from late 2019 to late June of 2022), the number of small business owners with debt from more than two sources multiplied by 4.4 times, from 75,000 to 330,000. The government plans to announce the “New Beginning Fund,” which would support struggling small business owners with low credit scores or long- or short-term overdue interests through interest reductions, long-term payment plans, or debt forgiveness, soon.

The finance world is also looking into ways to slow down increases in lending rates, as it’s being accused of “doing business with interest rates.” Lending rates are calculated by adding the additional interest rate to the standard lending rate. While banks cannot touch the standard lending rate, which is influenced by the standard interest rate, banks can adjust the additional interest rate, which they decide upon independently.

“On the ground, there aren’t that many customers for whom the top end of the lending rate applies, such as people with low credit scores,” said a banking official. “We will do our best to adjust the additional interest rate so the lending rate doesn’t increase too steeply.”

By Jun Seul-gi, staff reporter

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