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By Yoon Ja-young
As interest rates on loans are surging following a U.S. key rate hike, the self-employed, already suffering from a sluggish economy and soaring costs following the steep minimum wage hike, are facing snowballing burdens of paying back loans. Analysts warn that it could hamper economic recovery as well as cause trouble in the financial market if they have problems paying back loans.
According to Bank of Korea, the balance of loans of the self-employed surpassed 300 trillion won ($272 billion) last month. It has increased at double the pace of the total household loans, which grew at 2.6 percent. It also contrasts with mortgage loans, which have slowed down growth due to tougher regulations.
The loans have surged steeply as lenders have been actively extending credit loans amid tougher regulations on mortgages, while an increasing number of the self-employed are resorting to loans due to worsening profit.
However, analysts warn that they are more vulnerable in paying back loans. According to a 2017 household financial welfare survey, the ratio of those who failed to pay back loans on time stood at 8.53 percent for the self-employed, which is much higher than the 4.77 percent of the salaried workers.
"As income and the employment deteriorate due to the sluggish economy, the self-employed as well as those with poor credit, low income or multiple loans are likely to have problems in paying back loans," said Lim Jean, a research fellow at the Korea Institute of Finance.
He added that their burden to pay back loans will increase more than other groups as many of them got loans on floating rates. Among those who have loans, the self-employed spent 42.4 percent of their disposable income to pay back loans, which is far higher than the 29.8 percent of salaried workers.
The Bank of Korea has not raised its key rate yet, but the interest rate is continuing to rise, with the mortgage rate already hovering at 5 percent. It cannot continue freezing the key rate either since it might lead to a capital exodus with global funds deserting Korea to seek higher interest rates in the United States. If it raises the key rate, the burden of paying back loans will snowball. A 0.5 percentage point rise in borrowing rates is estimated to increase interest burdens on households by an annual 4.7 trillion won.
"Due to the delay in economic recovery, corporate restructuring and the anti-graft law, the income condition is likely to worsen for the self-employed," Lim said. According to analysis by the central bank, a 0.1 percentage point rise in the borrowing rate increases the risk of them shutting down their businesses by up to 10.6 percent.
Analysts also warn that the surging debt burden will hamper economic recovery.
"The vulnerable groups will be in trouble when borrowing rates rise. It will also restrict consumption, negatively affecting economic recovery," said Ju Won, chief economist at Hyundai Research Institute.
