South Korea’s divisive parliament is in rare agreement that something has to be done to stop loan sharks from preying on a million desperate borrowers.
The global economic crisis has been a boon for private lending firms that operate outside the banking system. By law they can charge 49 percent interest per annum but many demand far more.
Members of parliament have proposed laws that would cut the interest rates private lenders can charge and push the criminal segment out of the sector.
Most money is lent by a few firms, operating within the law and advertising fast cash on TV.
But there are thousands of small lenders operating on the fringes of the law that target people desperate for money.
The latest worries come as household debt is rising in South Korea, hitting 661.51 trillion won (US$536.2 billion) at the end of June, equal to 65 percent of GDP.
“Households are spending more than they earn and their ability to pay off debt is weak. If interest rates rise and debt grows, this will pose problems for the economy,” said Jeong Young-sik at Samsung Economic Research Institute.
The amount owed to private lenders is relatively small, but lawmakers are worried about the wider social costs. Only about 5 percent of South Koreans use private lenders.
But the government financial regulator, the Financial Services Commission (FSC), said they account for about 85 percent of the country’s troubled debtors who are seriously behind in payments or on the brink of bankruptcy.
The typical loan made by the some 16,000 private lenders is for a few thousand dollars for household expenses or to start up a small business, the commission said.
The FSC launched its own crackdown in April and said it would start a 3 trillion won fund to provide low-interest loans for people who would typically borrow from private lenders.
It forced about 1,000 lenders out of business.
Laws before parliament would lower the ceiling for rates to about 30 percent for non-secured loans and increase fines and punishments for those caught violating the law.
Earlier this year, South Korean media was saturated with the story of a young women who borrowed about US$2,500 to pay college tuition and was slapped with illegal fees that put her interest rate at nearly 350 percent, forcing her to take out another loan.
The lender then forced the woman into prostitution to pay off her debt. Her father was dragged into the mess and also fell into debt. He ended up killing his daughter and committing suicide.
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