Loan alternative neededIt is not easy for close friends or family members to refuse to co-signing a bank loan. But there have been many cases of family bankruptcy after doing so.
There is a dilemma in the loan co-signing requirement that is often called “economic guilt by association.”
The Industrial Bank of Korea will remove the requirement beginning next month, meaning it will make a decision on loans based purely on a borrower’s credit worthiness.
One does not even have to explain the possible pitfalls of the co-signing system.
The social and economic damage in the wake of the 1997-98 Asian financial crisis was significant, after so many households went bankrupt and families were broken up in this “trap of co-signing.” But loan co-signing, even after that, did not stop.
The combined debt tied to loan co-signing amounts to 180 trillion won in non-banking financial sectors, including insurance and mutual savings banks, while the number of co-signers stood at 3.34 million.
The average debt tied to each co-signer is more than 53 million won.
One cannot even estimate how much that will be in private financial markets.
It will eventually cause a terrifying social problem if the economy faces an unexpected downturn.
The loan co-signing system is a very backward practice, whereby a lender passes the buck and transfers the risk that he or she is supposed to take to a co-signer.
Advanced countries like the United States or Britain have no such practice, and co-signing is implemented through financial companies in charge of such operations.
Japan has the co-signing system but few people actually use it.
Now is the time for us to break the vicious cycle.
We urge other financial companies to enter the fray as well.
Certainly, the removal of the system may make it harder on individuals or companies with spotty credit and little collateral. But those problems should be solved through loan guarantee insurance companies.
Today, the practice of putting a massive debt load on another individual should be ended.