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Soaring interest rate burdens young borrowers, small business owners

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A sign shows credit loan services for individuals and small businesses being offered at a branch office of a major bank in Seoul. Korea Times file
A sign shows credit loan services for individuals and small businesses being offered at a branch office of a major bank in Seoul. Korea Times file

By Yi Whan-woo

The key interest rate, raised to the highest level in nearly three years, Thursday, is putting mounting pressure on young borrowers, who took out bank loans to buy homes back when the base rate was much lower.

The rate also brings with it huge a financial burden to struggling small business owners who will need to repay loans when the government's ends the extensions to the deadline for repayment.

The worrisome situation facing the two aforementioned groups of borrowers comes as the Bank of Korea (BOK) is open to additional hikes after it raised the base rate, Thursday, by a quarter percentage point to 1.5 percent ― the highest level since July 2019.

It was the fourth pandemic-era hike following those between August 2021 and January, in a bid to cope with soaring inflation and also a possible flight of foreign capital, as the U.S. Federal Reserve is moving faster on its own interest rate hikes.

Multiple economists forecast Korea's base rate will increase to 2 percent or higher by the end of the year.

The annual housing loan rate rose accordingly for the ninth consecutive month as of February, and averaged 3.88 percent, according to the latest BOK data.

The February figure was the highest since March 2013 when it hit 3.97 percent.

At its height, the housing loan rate among major commercial banks exceeded 6 percent, and "it is a matter of time" until this surpasses 7 percent, according to market observers.

"Under the circumstances, borrowers will find it extremely stressful whenever the central bank holds a rate-setting meeting," Mirae Asset Securities analyst Min Ji-hee said.

The problem is serious considering nationwide household debt amounted to 1,862.1 trillion won in 2021.

In particular, young borrowers were found to be especially likely to have outstanding payments.

The rate of overdue payments among those in their 20s and 30s is increasing faster than those of other age groups ― up from 5 percent at the end of the first quarter of 2021 to 5.8 percent by the end of 2021.

"Many young people can be said to be on the verge of default risk, when the pandemic is over and borrowers are asked to repay loans more quickly," Korea Institute of Finance researcher Shin Yong Sang said.

Concerning small business owners, their combined bank loans amounted to 909.6 trillion ($739.8 billion) in 2021 ― the highest level since 2012 when collection of relevant data began.

The loan amount was up 13.2 percent from 2020. The increased rate was 1.74 times higher compared to that of combined deposit loans of different groups of borrowers.

At the same time, the sales of small businesses dropped 5 percent while their operating profits fell 43 percent between 2019 and 2020.

Their average operating profit is currently at 1.58 million won, which the market observers say is "burdensome" to pay back the average monthly interest of 760,000 won.
Yi Whan-woo

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