Up to 119,000 Low-Credit Borrowers Pushed to Illegal Private Loans Last Year, Reaching KRW 1.5 Trillion

Amid tighter lending regulations and economic stagnation, an analysis indicates that the scale of low-credit borrowers driven into the illegal private loan market is estimated to be up to 1.5 trillion won (approx. USD 1.1 billion).

According to the Korea Financial Inclusion Research Institute on Tuesday (July 28), a survey of 977 low-credit borrowers (credit ratings 6 to 10) who used licensed lenders or private loans within the past three years showed that 59.4% of respondents reported being rejected for loans by registered lending companies.

The institute estimated that between 59,000 and 119,000 low-credit borrowers shifted from licensed lenders to illegal private loans last year.

The amount borrowed by these individuals through illegal private loans was analyzed to be between 760 billion won and 1.55 trillion won.

This is about double the level from the previous year.

The institute explained, "There are 196,000 new loan borrowers at 43 lending companies that provide information to NICE Information Service, with loan amounts totaling 2.09 trillion won," adding, "This is the result of relatively creditworthy borrowers, pushed out of primary and secondary financial sectors due to stricter lending regulations, flowing into the lending market."

In addition, it stated that the loan approval rate of lending companies for the bottom 50% of low-credit borrowers fell 0.5 percentage points from the previous year to 9.1%, while the illegal private loan migration rate rose from 5.2% to 7.5%.

Basic living expenses (41.0%) and rolling over existing debts (26.1%) accounted for the majority of loan usages.

In particular, among young adults in their 20s, the rate of simultaneously using registered companies and illegal private loans was the highest at 8.9%.

The institute pointed out as a problem that a significant number of vulnerable groups were exposed to illegal private loans without being aware of the risks.

The proportion of respondents who said they borrowed knowing it was illegal private financing plummeted from 77.7% in 2023 to 50.9% last year.

Due to an increase in involuntary usage among financially vulnerable groups such as homemakers and part-time workers, 55.8% of lending market users were unable to distinguish between registered lenders and illegal private lenders based solely on their business names.

The institute emphasized the urgent need to establish a financial safety net that connects borrowers rejected by lenders to policy-based financing, debt adjustment, or welfare programs to prevent them from falling into illegal private loans.

The institute suggested, "Identification markers should be improved so that consumers can recognize illegal lenders," adding, "We should also consider introducing a 'Korean-style self-regulatory loan control system' that allows consumers to voluntarily apply for loan blocks to prevent impulsive borrowing or excessive debt."
※ Please note: This article was translated by AI and may contain errors.