The amount of new loans from loan shark companies has surged to a 3.5-year high, indicating a growing trend of middle-to-low credit individuals turning to such lenders due to stricter regulations by the government.
The new loan amount from leading loan shark companies in South Korea reached its highest level in three and a half years, largely attributed to increased demand from individuals with mid-to-low credit scores displaced by stricter lending regulations imposed by the government. According to statistics submitted by the Financial Supervisory Service to the National Assembly, the amount of new loans disbursed by major loan shark firms during the fourth quarter of last year totaled approximately 795.5 billion won, reflecting a 23% increase compared to a year earlier and an 8% rise from the preceding quarter.
This surge in loan amounts marks a significant rebound from earlier harsh conditions faced by loan shark companies, which saw their lending drastically reduced to around 200 billion won in the first quarter of last year due to liquidity issues and soaring borrowing costs triggered by the 'Legoland incident.' Following a period of stagnation with new loan amounts fluctuating around 600 billion won until the second quarter of 2024, the fourth quarter registered nearly 800 billion won, alongside a rapid rise in the number of new users seeking loans from these companies. The growth in user numbers from the previous consistent levels around 60,000 to over 87,000 indicates a troubling trend towards relying on higher-interest options amidst government-imposed challenges.
Experts warn that existing low-credit borrowers who have previously relied on registered loan shark companies may increasingly find themselves forced into the realm of illegal money lending, which offers significantly higher interest rates than licensed firms, potentially leading to dire financial consequences. Registered loan shark companies adhere to a legal maximum interest rate of 20% per annum, while the average interest rate of illegal money lenders skyrockets to 535%. This situation raises concerns over a rising cycle of debt among financially vulnerable individuals, who may see no relief despite efforts from financial authorities to regulate lending practices and protect consumers.
