This year, neither a lender nor a borrower be

Borrowing money is getting harder as credit card companies jack up interest rates and even private lenders turn away customers.

A cash-strapped small business owner is desperate to borrow 20 million ($16,611) won. His applications to banks were turned down because he's already highly indebted as a result of the pandemic: he owes 100 million won.

“I never thought private lenders would refuse to lend without collateral,” he said.

He may end up resorting to illegal moneylenders — and paying through the nose.

According to a Credit Finance Association report released Jan. 21, interest rates on credit card loans from eight credit card issuers – Lotte Card, Samsung Card, ShinhanCard, Woori Card, KEB Hana Card, Hyundai Card, KB Kookmin Card and NH Nonghyup Card – averaged between 12.1 to 14.94 percent, up 0.7 percentage point from last July.

The number of credit card companies with an average interest rate of some 12 percent is down to one, KEB Hana Card, from three last November.

Interest rates on credit card loans are forecast to surpass the 15 percent mark, as the central bank raises rates.

Some new regulations are also making borrowing more fraught.

Starting this year, credit card loans will be included when measuring a person’s debt service ratio (DSR), calculated by dividing a person's income by his or her monthly loan payments. The DSR indicates a person’s financial capability to repay debt.

Private lending companies, which charge higher interests than banks, are focusing on mortgage lending instead of unsecured loans.

The Financial Supervisory Service found last December that 51.9 percent, or 7.5 trillion won, of the total amount of loans outstanding in Korea was secured by collateral such as cars or houses as of June, up 19.7 percentage points from 2018. It was the first time that the secured loans exceeded unsecured.

As lenders hesitate to help individuals with low credit scores, some are turning to pawnshops.

Pawnbrokers offer loans for humble types of collateral such as jewelry or luxury bags.

“Since the middle of last year, there has been a significant increase in the number of people who borrowed money on luxury bags or watches,” said an employee at a pawnshop that has over 10 branches through the country. “The younger generation, especially, often brings in electronics such as smartphones or laptops to get cash.”

The biggest reason for lenders to become pickier about borrowers is a downward shift in the legal interest rate.

The legal interest rate cap, which is the highest rate of interest that can be charged on loans, was lowered to 20 percent last July after two interest rate cuts, from 27.9 percent of 2017.

Some politicians proposed to make it lower — to the mid-10 percent range — ahead of the presidential election scheduled in March. But that will require new legislation.

Lowering the legal interest rate is a double-edged sword. The financial burden on households may decrease, but getting loans will be harder as lenders become choosier about whom to do business with.

The loan market is already shrinking.

Some domestic lenders have withdrawn from the market. Welcome Creditline of Welcome Financial Group and Anyone Capital Corporation shut down at the end of last year, while Joy Credit, the fifth-largest private lender operating in Korea, halted new loans from January 2020. Sanwamoney also stopped lending in 2019.

“If the legal interest rate goes even lower, cash-strapped people with low credit scores might have no choice but to resort to loan sharks,” said Park Young-bum, an economics professor at Hansung University.

Ahn Dong-hyun, an economics professor at Seoul National University, emphasized that government intervention is needed.

“The government should come up with adequate measures to protect the vulnerable from falling into the hands of loan sharks as interest rates go up,” said Ahn.

BY YEOM JI-HYEON, YOUN SANG-UN [shin.hanee@joongang.co.kr]