Reduce side effects

The ruling Democratic Party and government have agreed to push down the statutory maximum interest rate from 24 percent to 20 percent starting in the latter half of next year. Thanks to the move, 2.08 million people can save 483 billion won ($435 million) a year — particularly for low-income earners and low-credit borrowers who have to turn to expensive loans due to their low credibility.

Lowering the maximum interest rate had been President Moon Jae-in’s campaign promise. The reasoning for the lowered interest rate for people with low credit has the backing from the opposition front, as well. Although the maximum interest rate should go down in line with a record-low benchmark rate, rushing with the move without respect to the market conditions could cause side effects. The move could end up hardening low-credit people more.

The maximum interest rate has come down significantly since 2002 when the government fixed it at 66 percent. Every time the cap was lowered, low-credit people were shunned by secondary or third-tier lenders and pushed to seek illegitimate loans in the black market. Lenders in the lower-tier category went out of business and made borrowing conditions for low-credit people even harder. They become subject to nightmarish lives of outrageous interest rates and harassment by illicit lenders. Over 100,000 are estimated to be using illicit loans because they were rejected even by low-tier lenders.

The government projects that about 39,000 will have to turn to predatory lending if the maximum legal loan charge decreases. The government plans to expand relief or bailout measures for delinquent borrowers. But they cannot be a reliable safety net. The banking sector estimates 600,000 would be shunned by the legitimate lending category and many of the third-tier lenders could go bust due to the lowered interest rate, which will further deepen the pain of the low-credit people.

Many government policies designed to relieve the weak produced the opposite results. The spike in the minimum wage rather reduced jobs for temps and the cap on the prices of new apartment offerings only fanned a panicky housing fad. Tenant laws only dried rents and pushed up rent fees. Lowering the legal interest rate therefore requires more study and discussion.