Borrowers with low credit scores turn to loan sharks for money

The Korea Times

The Korea Times

Finance

Tue, September 26, 2023 | 08:13

Economy

Borrowers with low credit scores turn to loan sharks for money

Posted : 2023-05-16 08:18

Updated : 2023-05-17 07:58

A flyer advertising private loans is placed on the floor of a market in Seoul. Newsis

By Anna J. Park

As many as 71,000 people with low credit scores were found to have turned to loan sharks to borrow money last year as interest rates surged, according to a recent survey by Korea Research Institute for Financial Inclusion, whose results were announced, Monday.

The research institute surveyed 5,478 people with low credit scores and 23 loan companies from mid-December of 2022 until the end of January this year.

That marks a 26 percent increase compared to a year ago. In 2021, about 37,000 to 56,000 people bad credit were estimated have turned to loan sharks to borrow money.

It is also estimated that loan recipients with low credit scores borrowed around 1.23 trillion won ($910 million) in 2022, which is up around 26.8 percent compared to 2021.

As authorized financial institutions have seen a decrease in new loan demand amid a steady increase in interest rates, the number of people turning to loan sharks has surged, according to the survey. After the legally-authorized loan interest rate was capped at 20 percent from 24 percent in July 2021, many people with low credit scores were found to have turned to loan sharks to borrow money.

Also, 41.3 percent of the survey respondents said the aggregate amount of interest paid throughout 12 months was larger than the principal of their borrowings. Over 77 percent of respondents who had turned to loan sharks before said they still decided to borrow from them even though they were aware of the legal risks.

"In addition to the interest rate hikes last year, legitimate lenders have been raising the bar for their loan products, resulting in low-income borrowers with bad credit be excluded from legal loan markets," the research institute said.

annajpark@koreatimes.co.kr