Low-income renters have new, cheaper loan option

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Low-income renters have new, cheaper loan option

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Low-income households living on half jeonse will be able to receive a monthly rent loan at 5 to 6 percent annual interest.

Jeonse is a unique lease system in Korea, where the tenant pays roughly half the market price of the unit up front as a deposit and gets the money back at the end of the contract. Half jeonse is a lease contract often used by low income households.

The Financial Supervisory Service (FSS) said it plans to offer monthly rent financing loan guarantee insurance starting in March to promote housing stability among low-income households.

The product is similarly structured to banks’ overdrawn accounts. Under the new program, the bank remits rent to the landlord’s account each month. The tenant’s loan balance increases by an equal amount and can be repaid at any time.

A half jeonse tenant with a credit rating of grade one to eight with a year or more remaining in the rental period is eligible to apply for the loan guarantee insurance.

The tenant can borrow a sum not to exceed the total of rents for the contract period and no more than 50 million won ($49,920).

However, that the tenant has to leave his or her deposit as security for Seoul Guarantee Insurance Company.

If the tenant fails to repay the loan, the insurance company pays the bank debt. The product will be introduced next month at Shinhan Bank.

“Until now, low income households with low credit ratings had to get loans from non-banking financial institutions at interest rates of 15 percent to 25 percent,” said an FSS official. “However, from next month such households will be able to receive a bank loan at 5 percent to 6 percent.”

The FSS devised the product as more lease agreements have been changed from jeonse to half jeonse due to soaring rents.

The FSS estimates the new insurance will ease the burden of monthly rent interest rates on 44,000 households by 104,000 won per household or a total of 4.6 billion won annually.

However, some industry observers say the effect of the insurance will be limited since it applies only to rent, not deposits.

“Since there is already a 4 percent interest rate jeonse loan policy product for low income households, there are not many of those who wish to switch from jeonse to monthly rent,” said an bank official. “The number of applicants for the monthly rent loan will be less than expected.”


By Son Hae-yong [kjy@joongang.co.kr]

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