Gov’t lowers ceiling on some lenders’ interest rates

The government is set to lower the maximum interest rate ceiling on loans to 24 percent, stirring up concerns about interference in the market and the possible effects on people with poor credit scores.

The Financial Supervisory Service, the nation’s financial watchdog, said in a press release it will “push ahead with lowering of the legal maximum rate,” in order to give a break to people with loans with high interest rates. The announcement came less a month after President Moon Jae-in announced a five-year plan for the economy that promised a slashing of the maximum interest rate ceiling to 20 percent over the president’s term. The current ceiling set by the government is 27.9 percent.

The FSS set Aug. 7 to 22 as a notification period for the change. After an examination by the Ministry of Government Legislation in September, the amendment will be announced publicly in November before officially going into effect in January next year after a three-month grace period.

Critics say it could backfire, giving little relief to people forced to take out loans at high interest rates because of poor credit histories, while drying credit available for others in the same position.

According to data by the Financial Services Commission, the nation’s top financial regulator, the number of customers of private lenders - called consumer finance companies in the U.S. - fell by nearly 200,000 in 2016 when the ceiling was officially lowered from 34.9 percent to the current 27.9 percent. If the rate goes down more, nearly 340,000 potential borrowers will be disqualified for loans, leaving them no choice but to turn to the last resort: illegal loan sharks who charge anywhere from 100 to 200 percent and even 300 percent or more in certain cases.

The FSS said the revised ceiling will be applicable to new or renewed loans. Existing loans will be excluded.

“It’s difficult for us [to say how the cut will impact the market,” said a source at the FSS. “The rate cut was more of a political decision and [its effect is] beyond our judgment.”

“However, after the cut, only major private lenders will survive to do credit loans,” the source added. “Private lenders are already in a pinch and it will only get more difficult for them to issue loans to borrowers with poor credit rating.”

Japan underwent similar cuts about a decade ago.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]