This blog post examines the structure of debt permeating our daily lives, from credit card usage to home equity loans, and calmly explores the implications of household debt for individuals and society. It seeks the criteria for making choices.
Loans are like ‘alcohol’
A loan, simply put, is ‘incurring debt’. Having debt isn’t necessarily bad. The problem lies in ‘excessive borrowing’, not borrowing itself. In this sense, loans resemble alcohol. Alcohol, when consumed in moderation, plays a positive role. It can aid blood circulation, temporarily ease the burden of hard work, and inject vitality into life. However, problems arise when one drinks excessively beyond their capacity, causes accidents under the influence, or becomes overly dependent on alcohol, leading to alcoholism. Loans are no different. If borrowed at the right time, within manageable limits, used wisely, and repaid on time, taking out a loan doesn’t inherently cause problems.
To borrow ‘well’
Among adults in South Korea, are there really any who have never taken out a loan? Probably fewer than you might think. Loan types are extremely diverse, and borrowers choose products suited to their circumstances and goals. College students, for instance, frequently use student loans. By the time they graduate and repay those loans, it’s often time to buy a home. Those without the lump sum needed for a jeonse deposit turn to jeonse loans. Especially in the Seoul metropolitan area, buying a home without a mortgage is nearly impossible due to sky-high property prices. Overdraft accounts are a loan product primarily used by salaried workers, and many also utilize card loans or services from lending companies.
These are relatively common loan examples encountered in daily life. So, can someone who has never used these products claim, “I have no loans”? In fact, there’s one product so ubiquitous that people often use it without even recognizing it as a loan: the credit card. Consider the process of using a credit card. The moment you purchase an item and pay with your credit card, something quite interesting happens. Despite making a purchase, the balance in your wallet or bank account doesn’t decrease immediately. Yet, you still acquire the item. The actual payment isn’t made until the due date. In other words, from the day you buy something with your credit card until the money is deducted from your account on the due date, you are essentially using a type of loan product. Living without any loans is, therefore, very difficult in reality. That’s why properly understanding loans is the starting point for wise financial activities.
The interest rate banks refer to usually means the ‘annual percentage rate’ (APR). This is a figure indicating how much interest is paid or received relative to the principal amount over a one-year period. Consider the following article headline:
“Lending Firms Closing Doors Even to Low-Credit Individuals… ‘Proper Interest Rate Must Be at Least 26.7% Annually’” (The Korea Economic Daily, November 15, 2022)
The maximum interest rate a loan company can charge after lending money is set by law and is called the ‘statutory maximum interest rate’. As of 2024, South Korea’s statutory maximum interest rate remains at 20% per annum. High-interest loan companies exist because there are people who cannot access banks’ low-interest products. From the borrower’s perspective, the interest rate still feels excessively high. However, lenders argue that rising market interest rates have increased their borrowing costs and heightened the risk of default, making it difficult to sustain operations at 20% per annum. In practice, some lenders are surviving by refusing to lend to those with low credit ratings and are calling for raising the statutory maximum interest rate to at least 27% per annum. The statutory maximum interest rate, which reached 66% per annum in 2007, has gradually decreased since then to its current level. Rather than unconditionally blaming lenders struggling due to low rates or individuals pushed into illegal underground lending because they cannot access even high-interest loans, it is crucial to focus on improving the social structure itself to reduce the number of such people.
Borrowing money using your home as collateral to buy a home
When ordinary people need a large sum of money, the loan product they usually think of first is a ‘mortgage loan’, often shortened to ‘mortgage’. The price of a 30-pyeong apartment in a decent location in Seoul often far exceeds 1 billion won. However, this doesn’t mean all owners of such apartments are wealthy individuals holding over 1 billion won in cash. The saying “The bedroom is mine, but the living room and guest room belong to the bank” is no exaggeration. A home equity loan is a method of borrowing money by pledging the purchased home as collateral to the bank. It also means that if the borrower fails to repay the loan, the bank can sell the pledged home to recover the money lent.
From the borrower’s perspective, the lower the loan interest rate, the better. Based on this interest rate structure, loan products are divided into variable-rate and fixed-rate products. Variable-rate products have interest rates that change during the loan period, while fixed-rate products have interest rates that remain unchanged. At first glance, fixed-rate products, where the interest rate doesn’t change, seem more favorable. From a household financial management perspective, having a consistent monthly payment is much easier to manage.
However, when designing loan products, banks often set the interest rate for variable-rate products lower than that for fixed-rate products. Furthermore, if interest rates fall, the interest burden in the future may decrease. Of course, this situation does not occur frequently. The repayment period for a mortgage typically ranges from 30 to 40 years, with some products extending up to 50 years. Due to such lengthy repayment periods, even fixed-rate products are usually designed to convert to variable rates after a certain period.
“Variable → Fixed Rate ‘Special Home Loan’ Temporarily Operated Next Year” (Dong-A Ilbo, 2022.12.07.)
From the bank’s perspective, lending money at a variable rate isn’t a major problem even if interest rates rise. If borrowers default, the bank can sell the collateralized property (the home) to recover the loan amount. However, the government’s position is different. Or rather, it must be different. If rising interest rates force households to sell their homes to pay off debt, and that anxiety spreads to the entire population, the national economy as a whole could be shaken. Therefore, certain safeguards are necessary. For this reason, the government consults with banks to prepare loan products that are relatively less affected by interest rate fluctuations and offers them to the public. Of course, banks do not always actively cooperate with such policies.
The problem is that even if a loan product favorable to me becomes available, banks don’t notify me individually like they do with tax bills. To avoid missing out on good loan products, it’s necessary to consistently check news related to financial policy.
So just how serious is our current situation that the government must even consider designing loan products directly?
“Is the ‘Leverage-Driven Debt Party’ Over? Household Loan Reduction Begins” (Maeil Business Newspaper, December 2, 2022)
“Debt of 20s ‘Leverage-Driven Debters’ Surges 41%… Household Debt Approaches 100 Million Won This Year” (MoneyS, December 1, 2022)
According to the Bank of Korea’s November 2022 announcement, the outstanding balance of domestic household loans reached approximately 1,800 trillion won. While the subsequent trend of interest rate hikes put the brakes on ‘young-kkeul’ (borrowing to the hilt) and ‘debt-fueled investment’ (investing with borrowed money), somewhat moderating the growth of household loans, the scale remains enormous. No matter how much national household debt there is, it might feel irrelevant if you or your family have no direct debt. However, as long as we live in the same country, we cannot be completely free from the expanding household debt problem.
The situation is particularly severe for those in their 20s. Debt among those in their 20s, who actively pursued gap investments requiring minimal down payments and covering only the difference, surged by 41% compared to 2021. Household debt per household has also risen from around 50 million won a decade ago to nearly 90 million won recently. Even if the growth rate of household loans is slowing, this structure carries a significant risk of becoming a trigger for an economic crisis.
As burdens grow, people eventually emerge who give up repayment, declaring, “I simply can’t pay this debt back, so do whatever you want with it.” The first group to abandon repayment are those with no income or very little. Next come those who own apartments but have excessive loan sizes. The only option left for them to repay their debt is to sell their apartment. When more apartments hit the market, i.e., when supply increases, apartment prices fall. In Korea, where ‘apartment prices equal wealth,’ falling home values mean household assets decrease across the board. Simultaneously, bank non-performing loans—money lent but not recovered—increase. Citizens become poorer, and banks become poorer. Citizens with reduced spending power cut back on expenditures, leading to decreased corporate sales. Ultimately, this is a structure where the entire nation becomes poorer.
Household debt increases → Disposable income growth rate < Principal and interest repayment growth rate → Increased spending and expanded burden → More households go bankrupt → Bank insolvency expands → Economic recession
While somewhat simplified, the phenomenon of continuously rising household debt is aptly likened to a time bomb. The fortunate aspect is that it is a ‘time’ bomb. If we succeed in defusing it within the allotted time, the bomb won’t explode. The role of defusing this bomb falls squarely on the government. In movies, a dashing actor often defuses the bomb in an instant and becomes a hero. But in reality, instead of such dramatic scenes, we need a government that silently buys time and adjusts the structure, bearing countless risks and burdens. That is the true form we should expect from our government in the face of this time bomb called household debt.
