Household Debt Keeps Spiraling out of Control

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August 19, 2021 13:23

Financial authorities are scrambling to come up with ways of curbing runaway borrowing as household debt keeps skyrocketing.

They believe spiraling loans are mainly to blame for the real-estate and stock-market bubbles since they are mostly used to invest in them. Koh Seung-beom, who has been nominated as chief of the Financial Services Commission, pledged Wednesday to use “all possible means” to curb household debt.

The government decided last month to cap the amount of loans per person in proportion with their income and gradually reduce their total debt by 2023. But that has angered borrowers in their 20s and 30s with relatively low wages.

One office worker in his 30s was surprised when he received a text message from his bank saying it would increase his interest rate again to 3.31 percent only a month after it was raised from 2.74 percent to 3.11 percent. He had borrowed W25 million to buy a house (US$1=W1,170).

The loan limits was reintroduced in April after being set aside due to the coronavirus pandemic. Financial authorities told banks to keep the increase in household lending at 5-6 percent, so banks started increasing interest rates.

“It’s impossible to reduce the limit on loans that have already been taken out. The only option we have is to raise the interest rate,” a bank staffer said.

The benchmark rate has been just 0.5 percent since May last year, but the average interest rate for loans from commercial banks reached 3.8 percent in June, up nearly one percentage point from a year earlier. But that has made little difference. According to the FSC, housing loans increased by W7.5 trillion and other loans by W7.7 trillion in July.

Last week the Financial Supervisory Service summoned executives at major banks and told them to reduce the limit of loans under W100 million from double the size of the borrower’s salary to the size of their salary. The FSS pledged on Tuesday to apply the same principle to second-tier lenders.

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