“Loan Shark” or “Life Saver”? Advantages and disadvantages of private lenders

Quinten Massijs (I) - The Lender and his Wife (Wikimedia Commons)

Quinten Massijs (I) – The Lender and his Wife (Wikimedia Commons)

SEOUL, October 25 (Korea Bizwire) – A “Usurer” is a derogatory term referring to a person or organization that offers loans at extremely high interest rates. Interest rates are so high that their lending practices are often accused of exploiting a borrower’s financial difficulties.

Cash loans to people who are in urgent need of cash play a positive role, however. Take the example of microcredit. This microfinance involves making very small loans to poor borrowers who typically lack collateral, stable employment, and verifiable credit history.

In many developing and underdeveloped countries, microcredit has made a significant contribution to poverty reduction. And in many cases, bright but poor entrepreneurs may be able to stand on their own feet, helped by micro-credit enterprises. More importantly, this new concept of loan enables women to be empowered and to uplift entire communities by extension.

Lending activities, in this regard, play both positive and negative roles. What about the role of licensed lenders in Korea? In this regard, fascinating research topics were discussed in Korea regarding the “positive effects of registered private lenders in terms of economic growth”, which was also one of the main themes of the 2014 conference on financing at consumption held on Jeju Island on October 23. , academics, as well as executives and local private lenders attended the event.

Based on eight-year data from 2006 to 2013 on the country’s top ten registered private lenders, the total production incentive effect they generated was estimated at 41.5 trillion won, or 1 , 55 times the total loan balance, Park Deok said. -bae, senior researcher at the Hyundai Research Institute (HRI), the Hyundai Group’s think tank.

According to HRI, the top ten lenders in the country created 260,000 jobs during the same period. Their contribution to the national economy was 0.08 percentage point per year, the researcher said, stressing the need for the country to shed a “fresh” light on the roles and functions of private (approved) lenders.

"Show me the money!"  (image: Kobizmedia / Korea Bizwire)

“Show me the money!” (image: Kobizmedia / Korea Bizwire)

At the end of March of this year, the number of people with bad credit in grades 7-9 was 5.06 million. The total amount of money they need to maintain their standard of living but which is not available in commercial banks and savings banks due to their poor credit rating is estimated at 39.4 trillion won. .

The demand for short-term loans from these low-credit people is about 18.7 trillion won, of which 42% (7.9 trillion won) is provided by the top ten private lenders. . The remaining balance of 10.8 trillion won is the excess demand for short-term loans.

But there is no denying that Korean household debt is snowballing. In fact, the country’s household debt has not only exceeded the OECD average, but has also reached a critical point that could trigger an economic crisis, according to an analysis by the Korea Institute of Finance last May.

And South Korea’s recent moves to stimulate the struggling economy – including a wave of interest rate cuts among them – could increase already-growing household debt. The Bank of Korea cut its key rate another quarter of a percentage point this month to 2%, the lowest in history, after falling 0.25 percentage points in August.

This is because money is scarce in the national economy and the government is singling out big companies saying they are unwilling to invest their money. Indeed, Lee Ju-yeol, governor of the BOK, in a meeting with the heads of large conglomerates on Friday, urged them to invest more to stimulate the national economy.

Money is really tight among those who are in desperate need of money. Statistics confirm this. Between 2013 and September 2014, there were a total of 757,812 advertising slots involving loaner services broadcast on cable TVs across the country, according to Congresswoman Ryu Ji-young (the ruling Saenuri party). This means that you are likely to watch an average of 1,400 slots of this advertisement per day on cable TVs nationwide.

The demand for short-term loans from these low-credit people is about 18.7 trillion won, of which 42% (7.9 trillion won) is provided by the top ten private lenders. .  (image: Kobizmedia / Korea Bizwire)

The demand for short-term loans from these low-credit people is about 18.7 trillion won, of which 42% (7.9 trillion won) is provided by the top ten private lenders. . (image: Kobizmedia / Korea Bizwire)

The barrage of cash lending advertisements reflects a growing need for cash loans among ordinary people who cannot afford loans from the big banks. Most of them are “working poor”.

The country’s five largest private lenders have paid a combined advertising budget of 480 million won over the past four years, according to the lawmaker. And the return on their advertising investment is immense: they reaped 6 trillion won in profit for the same period. Money lending is once again proving to be a lucrative business in South Korea.

All in all, the country’s private loan service industries could benefit from much faster sales as money tightens due to the economic slump.

This could increase the prospects for much stricter related regulation of the private lending industry. But, to the extent that private money lending businesses have positive and negative effects, there should be a much more balanced or creative approach to the consumer finance sectors – particularly in the areas of small finance. ready, the HRI researcher said at the conference.

By MH Lee ([email protected]) and contributed by Jerry M. Kim ([email protected])

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