Low-Credit Borrowers Flocking to High-Interest Loans Amid Financial Authority Curbs
As lending conditions at major financial institutions like banks become stricter, individuals with lower credit scores are finding it harder to borrow money, leading them to seek out credit card loans or informal lending with much higher interest rates. This trend can exacerbate the financial difficulties of vulnerable populations who already struggle to access funds. As the lending threshold at mainstream financial institutions rises, vulnerable borrowers facing difficulties in accessing funds are increasingly turning to high-interest markets such as credit card loans and private lenders, mirroring a significant decrease in credit loan supply to low-credit individuals last year compared to overall credit loans.
Credit loan supply for low-credit individuals, defined as those with a KCB credit score in the bottom 20% or lower, amounted to 30 trillion won last year, an 11.0% decrease from 33.7 trillion won in the previous year. During the same period, the overall credit loan supply decreased by 9.1% from 141.1 trillion won to 128.2 trillion won, indicating that the reduction in loans for low-credit individuals outpaced the overall average. With stricter lending criteria from first and second-tier financial institutions, credit loans for low-credit individuals from banks fell by 500 billion won, and those from savings banks and credit card companies decreased by 1.7 trillion won each. In contrast, credit loan supply to low-credit individuals from private lenders increased by 300 billion won to 1.7 trillion won. The proportion of credit card loans and private lending within the total credit loans for low-credit individuals expanded to 58.3% last year.
Ahn Yong-seop, president of the Korea Inclusive Finance Research Institute, warned that a higher proportion of high-interest loans for low-credit individuals could lead to a vicious cycle of mounting debt. Financial authorities are reportedly discussing policy measures to alleviate the "loan cliff" phenomenon for vulnerable groups. Earlier this month, Lee Chan-jin, governor of the Financial Supervisory Service, met with CEOs of savings banks and stated that incentives would be provided for the supply of mid-interest rate loans to mid- and low-credit individuals.