Inside the world of Korea’s loan sharks

A reporter went to a loan shark in Dongdaemun District, central Seoul, earlier this month, and asked for a loan.

“Write down contact information for ten relatives, colleagues and friends who can be contacted at any time,” the loan shark, who introduced himself as Park, said. When the reporter asked why, Park said there was no need to worry - as long as the payments on the loan were made on time.

The reporter resisted, and Park got mad. “I am lending you money without checking your credit history,” he yelled, “You don’t think I deserve to get this information?” It was plain that Park would try to collect payments from the reporter’s relatives and friends if he failed to pay on time.

The reporter wanted to see how illegal private loan sharks operate in the country. He found Mr. Park’s business card on a lamppost in Jongno District, central Seoul, and called him. He was instructed to go to Janghanpyeong Station, exit No. 8.

When the reporter exited the station, Park was waiting in a minivan. He didn’t look like a villain from a movie. He was an ordinary man in his 40s.

The reporter said he needed 3 million won ($2,633) immediately. Park listed four requirements. First were the names of 10 contacts. Second, he needed the address of the reporter’s residence and workplace. Third, he must answer the phone at any time except during work hours from 9 a.m. to 6 p.m. And lastly, the reporter had to transfer repayments of the loan and interest every day before midnight.

Loan sharks’ debt collecting processes differ by the type of interest rate charged - daily or monthly - the amount borrowed and the purpose of the loan. For the 3 million won loan, Park wanted to collect 600,000 won in interest immediately: he would give the reporter only 2.4 million won. Then the reporter would have to pay 30,000 won of the principle and interest every day for 135 days. The yearly interest rate was 311.3 percent, more than 10 times the 27.9 percent legal maximum interest rate.

People who borrow from loan sharks realize the interest rate is higher than the legal maximum, but have no other options. Many are debtors with bad credit history who can’t borrow from financial institutions or consumer finance companies operating legally.

According to Consumer Loan Finance Association, the number of people borrowing from illegal private loan sharks rose from 330,000 in 2015 to 430,000 last year. The amount of such loans doubled from an estimated 10.59 trillion won in 2015 to 24.11 trillion won last year. The amount borrowed on average rose from 32.1 million won in 2015 to 56.1 million won in 2016.

According to the Consumer Loan Finance Association, the number of borrowers from consumer finance companies dropped from 1.27 million in September 2015 to 1.2 million in Dec. 2016. Their main borrowers were also people with poor credit histories. The association said the number of people with low credit scores borrowing from consumer finance companies was 940,000 in Sept. 2015, but dropped 9.7 percent to 840,000 as of end of last year.

When the government lowers the maximum interest rate ceiling, it says it is trying to help people with poor credit histories and low-income households. But sometimes it drives them to borrow from loan sharks.

Choi Jong-ku, chairman of the Financial Services Commission, announced last month that the maximum interest rate would be lowered from 27.9 percent to 24 percent on new loans.

That change will help 900,000 new borrowers save 148.1 billion won in interest payments, or about 164,500 won per borrower. But the lowered interest rate will make it tougher for people with poor credit histories to borrow, which will lead to a fall in the number of people able to legally borrow. They may resort to illegal private loan sharks.

According to Consumer Loan Finance Association, if the maximum interest rate ceiling drops below the 25 percent level, about 340,000 people will not be eligible for loans.

Analysts say the government should come up with ways to rescue people from loan sharks before making changes to the maximum interest rate.

“If the self-employed borrow money with interest rates over 20 percent, they are less likely to be able to pay back the loan,” said Park Chang-kyun, an economics professor at Chung-Ang University. “Borrowers have diverse financial backgrounds and conditions so the government needs to find policies that will apply different loan requirement processes for those types of borrowers.”

Some also argue that the government should expand its state-funded low interest loan programs to have more people eligible for loans.

“I think it’s necessary for the government to take care of the delinquency rate after applying the highest maximum interest rates for debtors and low credit score holders,” said Lee Jae-yeon, a senior researcher at Korea Institute of Finance.

BY JUNG JIN-WOO [kim.youngnam@joongang.co.kr]