Loan sharks take a big chunk out of debtors

A Seoul's district famous for private loan market.

Illegal nterest rates as high as 230%: gov’t

Kim Su-mi - not her real name - is a resident of the Wolgok district of Seoul. She begins her day by taking a good look at her bank book. Between paying off the principal and interest on loans she has taken out from some 20-odd private moneylenders, she owes a total of more than 900,000 won (US$910) daily. The 500,000 won she borrowed three years earlier to pay off advance interest on another loan created a new debt of accumulated interest; additional fees were levied when she was late on a payment. In order to redeem this debt, she borrowed money from here and there, and now she has reached the stage where she no longer knows how much principal and how much interest is owed and to whom. It is long since she turned over her store and the deposit on her apartment to moneylenders.

Before all of this, Kim ran a store selling dried fish, a common ingredient in cooking. She was not one to ask another for help. Even after a large-scale market opened up next door and her husband was injured in a traffic accident, she would not have normally considered taking out a private loan - until she heard about company X.

"They said it was an enterprise registered with the Seoul authorities," she explained. "I thought it would be different from those creepy geezers who take out ads in the paper." Naive as she was, Mrs. Kim sank into the bog of debt before long. The demands for debt repayment became more abrasive, and her husband took up the bottle once more, ending up in the hospital for alcohol abuse soon after.

"It’s not as if I live in luxury - I am poor as it is," she sobbed. "I work as a maid to pay off what I can, but this debt has grown beyond my control."

Korea’s working class is struggling under the shackles of usurious private loans. In 2002, the government took up the task of reforming the lending industry to protect people from shady private loan sharks by making low-interest loans available from established financial institutions. The "Law Relating to Lender Registration and Financial Customer Protection" was passed as a result, limiting high-interest annual rates to 66 percent. However, those would-be debtors who do not meet the conditions set by established institutions are being pushed into the market of high-interest rates that exceed the market rate - sometimes by a factor of 10.

The government cap of 66 percent was, aside from a handful of creditors, largely brushed aside. Most private loans on the market take the form of daily installment plans to be redeemed over a period of 60, 90, or 100 days. In the case that a payment is delayed by but a few days, the fee and additional interest start to swell rapidly.

Resident of Seoul’s Hwagok District, Park Sun-ok (not her real name) first sought out a lender two years ago to repay the debt accrued by his son. For a loan of one million won, she agreed to pay 13,000 won every day over a 100-day period. "I tried to pay it off on time" she said, "but as a paperhanger, there’s no money left for savings at the end of the day, and so I missed making payments about 10 times. I went to the creditor’s office after the period had ended, and they told me to take out another loan of 1 million won." This left her saddled with a 1 million won debt at a rate of 130,000 every day for 100 days. Following this pattern for a year (an annual rate of 109.5 percent), the accumulated interest payments far exceeded the initial loan. "When the interest increased, I was forced to take out separate loans," he explained "and after two years, I now owe 7 million won to four separate private lenders."

The government’s Financial Supervisory Service estimated the average annual interest rate of private lenders at 204 percent. Registered lenders’ mean annual interest rate is 167 percent, while the rate of unregistered ones is estimated at 230 percent. In both cases, the rates far surpass the legal interest rate limit of 66 percent. According to one employee at one such firm, "if we loan out 1 million won to 10 households, we make at least 150,000 won every day through installments, thus enabling us to make another loan. It’s a lucrative line of work."

Exploitation under the name of supplying urgent funds is also rampant in the marketplace. "Urgent money" loans are made primarily to those with poor credit and a pressing need for funding. These loans are available the next day, after handing over a copy of one’s Resident Registration Card and registered seal to the creditor firm. There is a high risk that such debtors with poor credit history will not repay the loan. Thus, the interest rate is nothing less than murderous. "Usually firms collect about 1 percent daily" said one lender, "but with applicants on the rise recently, word has it that some places have raised their rates to 2 percent daily."

Even so, authorities assert that overall interest rates will fall once lending reforms take hold. According to Jo Seong-mok, an official of the Financial Supervisory Service, "as foreign firms enter the lending market, creditors that once gathered an annual interest of 65.7 percent are now competing over interest rates, offering rates as low as 30 percent."

However, many specialists posit that so long as debtors in the lending market are in a desperate state and creditors are in a position of absolute superiority, market mechanisms will not take effect. That is why demands to lower the usurious rates of the private lending market are constantly being presented. The People’s Solidarity for Participatory Democracy called last month for limiting the annual interest rate to 40 percent on behalf of the people’s economic livelihood and to promote economic justice. Assemblyman Sim Sang-jeung of the Democratic Labor Party proposed a law of limiting the rate at 25 percent, and Lee Jong-kull of the Uri Party suggested legislation to set the limit at 40 percent while exempting from this maximum rate those lenders that register with the government. In line with this, the Ministry of Justice published a policy report last June declaring that "a law limiting interest rates is necessary to reduce the burden of private debts placed upon the social and economic underclass."

Lee Heon-ok, lawyer and chief of Implementation at the People’s Solidarity for Participatory Democracy’s Division for the Restoration of Citizens’ Rights said, "the government’s proposals are merely a means of protecting the status quo in the private lending market," adding that "underhanded and usurious private lending must be curtailed through regulations."

Lee said that "fear of the lending market consequently going underground must not become justification for opposing laws to cap illegal interest rates."

This article was written by Choi Hye-jeong and translated by Daniel Rakove.