2 Million Koreans Could Default If Loan Interest Rates Rise – The Chosun Ilbo (English Edition): Daily News from Korea

Nearly 1.9 million borrowers will have to spend more than 70% of their income to pay off their debts if the average interest rate on household loans drops to 7%, as seems likely.

Some 1.2 million of them will have to spend more than 90% of their income to repay their debts. Without extra income, that means they’re very likely to default. Their total debt will increase from 357.5 trillion won to 480.4 trillion won (1 USD = 1,313 won).

The Financial Watch Service announced the pessimistic projection earlier this week.

The Bank of Korea recently raised the base rate again – this time by 0.5 percentage points to 2.25% – and warned of further hikes this year. This brings the variable interest rate on home loans from KB Kookmin, Hana, Shinhan and Woori banks to 4.1% to 6.2%, while the interest rate on credit loans is 4.3% to 6.2%.

According to the projection, the number of borrowers who must use more than 70% of their annual income to repay the principal of their loans will increase by half a million to 1.9 million if the average interest rate on loans to households increases to 7%.

People with a debt service ratio (DSR) above 70% are considered by banks to be fundamentally unable to repay their debts. People who have borrowed money from subprime lenders or more than three different lenders will be particularly affected.

Financial authorities are proposing a number of measures to cushion the impact, offering support for people who have borrowed money from subprime lenders to switch to commercial banks and forcing lenders to publish their interest rates each month.

“If more borrowers find themselves unable to repay their loans due to soaring interest rates, we could see an increase in bankruptcies and a sharp drop in private consumption, leading to an economic slowdown,” he said. an official of the FSS. “We must take steps to ensure a soft landing before the interest burden increases.”

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Bernadine J. Perkins