Half of delinquent debtors fail to rebuild credit

More than half of debtors who default on their loans fail to regain their credit, according to a report released Thursday by the Bank of Korea.

The central bank tracked the credit of 397,000 borrowers who defaulted since 2014 and found it was nearly impossible to recover one’s credit after failing to make payments for three years. It was the first time that the central bank issued a report on the credit recovery of delinquent debtors.

According to the study, as of the end of June this year, 48.7 percent were able to rebuild their credit. Among those that got their credit back, 68.4 percent repaid their debt, while 20.1 percent readjusted their debt.

Those who recovered their credit within a year accounted for the most, 60.5 percent, while those that took between a year and two years trailed behind with 21.8 percent. Those who took more than three years accounted for the least, at 2.3 percent.

“The possibility of recovering one’s credit after failing to pay debt for more than three years becomes significantly slim,” the report said.

Borrowers who took out loans from non-banking financial institutions including savings banks (which in Korea are more like consumer finance companies that cater to bad-credit borrowers), credit card companies and private lenders had an especially lower chance of recovering their credit, according to the report.

By type of lender, 57.7 percent of those who borrowed from cooperatives were able to recover their credit, while 43.8 percent of those who borrowed from commercial banks were able to do the same.

However, among those who borrowed from savings banks, credit card companies and private lenders, only 30 percent of them were able to rebuild their credit.

The high rate of recovery at cooperatives could be attributed to their clientele, mostly farmers and fishery workers whose livelihood depends on their reputation in their community, which affects their will to repay debt.

Those with multiple kinds of loans had a lower possibility of regaining credibility than those who without, the report showed. The possibility of debtors with multiple loans recovering their credit was 34.9 percent, whereas those with only a single loan had odds at 63 percent.

The average loan per debtor with single loans was 52.2 million won whereas those with multiple loans the average was 96.7 million won.

Additionally, 42.1 percent of people who took out unsecured loans were able to recover their credit, whereas 77.1 percent of those who borrowed with collateral were able to regain their credibility.

Those employed at a company had a higher chance of recovering their credit (50.2 percent) than the self-employed (40.8 percent).

The odds of rebuilding credit were high in the case of students and stay-at-home moms, at 68.3 percent, mostly because the loans that these groups tend to take out are small. Various debt adjustment programs for student loans also help them recover their credit.

The Bank of Korea estimates that as of the end of June, there were 1.04 million people who defaulted on their debts, representing about 5.6 percent of the country’s 18 million debtors. The debt that these people have yet to pay stands at 29.7 trillion won ($26.1 billion), 2.1 percent of the overall 1,388.3 trillion won in household debt as of the second quarter.

The number of people who were overdue on payments for 90 days or more was 701,000.

BY HA HYUN-OCK [lee.hojeong@joongang.co.kr]