2 Million Koreans Could Default If Loan Interest Rates Jump

Close to 1.9 million borrowers will have to spend more than 70 percent of their income to pay back their debts if the average household loan interest rate rises to seven percent, as seems likely.

Some 1.2 million of them will to have to spend more than 90 percent of their income to repay their debts. Without additional income, that means they are highly likely to default. Their total debt will rise from W357.5 trillion to W480.4 trillion (US$1=W1,313).

The Financial Supervisory Service announced the pessimistic projection early this week.

The Bank of Korea recently raised the base rate again -- this time by 0.5 percentage point to 2.25 percent -- and warned of further hikes this year. That brings the variable housing loan interest rate at KB Kookmin, Hana, Shinhan and Woori banks to 4.1 percent to 6.2 percent, while the credit loan interest rate is 4.3 percent to 6.2 percent.

According to the projection, the number of borrowers who have to use more than 70 percent of their annual income to pay the principal on their loans will increase by half a million to 1.9 million if the average household loan interest rate rises to seven percent.

People with a debt service ratio (DSR) of over 70 percent are seen by banks as basically unable to service their debts. People who borrowed money from subprime lenders or from more than three different lenders will be hit especially hard.

Financial authorities are coming out with a number of measures to cushion the impact, offering support to people who borrowed money from subprime lenders to shift to commercial banks and requiring lenders to publicize their interest rates each month.

"If more borrowers end up unable to repay their loans due to surging interest rates, we could see an increase in bankruptcies and sharp drop in private consumption, leading to an economic slowdown," an FSS official said. "We must take steps to ensure a soft landing before the interest burden increases."