Tightening Unsecured Loans First... Add-On Rates Top 3.7%, Highest This Year
Unsecured Loan Rates Surge... Average 5.71% at Five Major Banks, 6.29% at Internet-Only Banks
Rise in Both Benchmark and Add-On Rates
Impact of Efforts to Manage Household Lending in Second Half
Borrowers Facing Rate Resets on Alert... Falling Stock Prices Add to Strain
The add-on rates on unsecured personal loans at commercial banks have approached 3.8%, reaching their highest level so far this year. Analysts say the average rate on these loans has climbed to 5.7% not only because benchmark rates have risen amid higher market rates, but also because add-on rates have remained elevated. Banks appear to have raised the bar for unsecured lending first as they stepped up efforts to manage the overall volume of household loans. Borrowers facing an upcoming rate reset may therefore face a heavier interest burden.
According to the Korea Federation of Banks on October 16, the average interest rate on newly issued unsecured personal loans at the five major banks (KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank) was 5.71% in August, up 0.24 percentage points from 5.47% the previous month. Compared with 4.79% in August last year, the rate rose by 1 percentage point over the year. Over the same period, the average rate on unsecured personal loans at the three major internet-only banks (KakaoBank, K Bank and Toss Bank) climbed from 5.16% to 6.29%, a steeper increase of 1.13 percentage points.
A closer look at unsecured loan rates shows that the rise in benchmark rates, driven by higher market rates, was a major factor. At the same time, higher add-on rates also increased borrowers' costs. Banks set loan rates by adding a margin to the base rate, which reflects market rates. They determine add-on rates at their discretion, taking into account operating costs, legal expenses and risk premiums.
The add-on rate on unsecured personal loans at the five major banks rose for three consecutive months from June, reaching 3.77% in August. That was up 0.12 percentage points from 3.65% a year earlier. The add-on rate had fallen from 3.64% in January this year to 3.56% in May, but began rising again afterward. As a result, the adjusted rate—the add-on rate minus preferential rates—also rose from 2.02% in May to 2.33% in August. This contrasts with the add-on rate on mortgages at the five major banks, which fell from an average of 3.26% in June to 3.15%.
The rise in add-on rates on unsecured loans appears largely attributable to banks’ efforts, starting in the second half of the year, to manage the overall volume of household lending, particularly unsecured loans. Unsecured lending surged in the first half of this year amid a “debt-financed investment” craze fueled by rising stock prices. According to the Bank of Korea, as of May, bank lending through unsecured personal loans had increased by KRW 3.7 trillion from the previous month, exceeding the KRW 3.2 trillion increase in mortgage lending. As household lending, led by unsecured loans, continued to grow rapidly and drew criticism, banks appear to have moved to make unsecured loans harder to obtain. “Banks have adjusted add-on rates to some extent as part of their efforts to curb unsecured lending,” a banking industry official said.
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With benchmark rates rising and add-on rates remaining high, borrowers are expected to face an even heavier burden. Those approaching a rate reset are on alert as their rates soar to around 6%. There are also concerns that borrowers who took out unsecured loans to invest in stocks may have less capacity to repay, as falling share prices coincide with high interest rates. According to the Financial Supervisory Service, in July this year, the delinquency rate on household loans at domestic banks excluding mortgages, such as unsecured personal loans, was 0.84%, up 0.07 percentage points from the end of the previous month. “If this trend continues to build, it could also put pressure on banks’ delinquency rates and asset quality,” a financial industry official said.
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