Loan interest rates rise sharply - The Korea Times
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Loan interest rates rise sharply


By Anna J. Park

Whether they're credit loans or mortgages, the nation's retail loan interest rates are rising sharply, posing an increasing burden on people who borrowed money from financial institutions.

Interest rates on credit loans extended by four major local banks ― KB Kookmin, Shinhan, Hana and Woori ― currently range between 2.59 percent and 3.65 percent a year for customers with the best credit ratings.

This is up around 0.6 percentage points from last July when interest rates were as low as 1.99 percent for customers with the best credit ratings. Such low interest rates were possible last year, as the Bank of Korea (BOK) lowered the key interest rate to a historic low of 0.5 percent amid the global pandemic shock. However, the tide is obviously changing.

The nation's mortgage interest rates are also rising, as the four major banks' lowest annual rate increased by 0.09 percentage points to 2.34 percent as of the end of last week, from 2.25 percent last July.

One of the main reasons behind the rising interest rates is a sharp jump in bond rates. Due to expectations of inflation and projections of a global economic recovery, long-term interest rates such as 10-year treasury bonds have been on an uptrend, posing risks to the prices of other assets such as stocks.

However, the upward swing of long-term interest rates alone does not explain the sharp rise in short-term interest rates represented by retail credit loans. Part of it is attributed to policy attempts by financial authorities since last October to cut down the amount of retail credit loans and curb the nation's soaring real estate prices.

As interest rates on such loans are rising, people who maximized their leverage for stock investments or real estate purchases will be facing an increasing burden in the near future.

Reflecting such increasing pressures, the total amount of credit loans extended by five major commercial banks in Korea ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― saw a slight fall during the past month. The entire amount of credit loans extended by the five banks stood at 135.1 trillion won ($120 billion) at the end of January, down by around 64.3 billion won in a month.

The nation's financial authorities are set to announce measures sometime next month to curb the amount of debt. The essential policy of the authorities is expected to be a 40 percent rule in the debt-servicing ratio (DSR) ― interest payments and debt amortization as a proportion of borrowers' yearly income ― for every borrower. This means that people who borrow money from financial institutions should keep their DSR under 40 percent.

Currently, loans of over 40 percent DSR are possible depending on each customer, as banks are now only obliged to keep their entire average DSR under 40 percent. Yet if the new rule is put in place next month, retail customers will face limits to how much money the can borrow.

Park Ji-won


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