Delinquency rate on anti-loan-shark policy loans tops 44%

The delinquency rate on a government policy loan designed to steer vulnerable borrowers away from illegal private lenders has surpassed 44%, with those under 30 posting a rate above 50% — underscoring the repayment burden on younger borrowers. As the government moves to lower the loan's interest rate and expand eligibility next year, managing the rising delinquency has emerged as a pressing challenge.

According to data submitted to People Power Party lawmaker Park Dae-chul of the National Assembly's Political Affairs Committee by the Financial Services Commission, the delinquency rate on the illegal private lending prevention loan stood at 44.3% as of the end of September. Of the total outstanding loan balance of 314 billion won ($234 million), 139.1 billion won was overdue. The delinquency rate measures the share of the outstanding balance on which principal or interest payments are at least one month past due.

By age group, borrowers in their 20s or younger recorded the highest delinquency rate at 50.7%. Those in their 30s were close behind at 45.5%, followed by borrowers in their 40s at 43.4%, their 50s at 41.4%, their 60s at 39.4%, and those 70 or older at 38.9% — a clear pattern of declining delinquency with age.

The overall delinquency rate has climbed steadily. After standing at 11.7% in 2023, it rose to 32.2% in 2024 and 37.8% last year. It reached 42.0% in June and added another 2.3 percentage points in just three months — a total increase of 32.6 percentage points since 2023.

The illegal private lending prevention loan is a policy product under the inclusive finance framework, aimed at helping low-income, low-credit borrowers access emergency funds without resorting to illegal lenders. Previously, applicants had to earn no more than 35 million won annually and fall within the bottom 20% of credit scores. Since September, however, recipients of basic livelihood benefits, near-poverty households and earned income tax credit recipients have been allowed to apply regardless of their credit score, provided they meet the income requirement.

From January this year, the interest rate on new loans was lowered from 15.9% to 12.5% per year, and the repayment structure changed from a lump-sum payment at one-year maturity to equal installments of principal and interest over two years. Borrowers who repay the full loan amount after meeting certain conditions are also eligible for a refund of half the interest they paid.

The government plans to overhaul the product next year under the tentative name "K-Minsaengjikkim Loan," further lowering the bar for eligibility. The income cap would be removed and the program extended to borrowers within the bottom 50% of credit scores. The initial loan ceiling would remain at 1 million won ($746), but the interest rate would drop to 4.5% per year and the repayment term would extend to 10 years. Borrowers with a strong repayment record would be eligible for an additional 1 million won, and the program would also seek to connect participants with mainstream financial institutions.

The FSC has allocated 300 billion won for the revamped program in next year's budget proposal. Combined with private funding, the government plans to supply a total of 600 billion won — three times the 200 billion won supply target set for the illegal private lending prevention loan this year.

With the government set to broaden both eligibility and the scale of lending, how to manage the already high delinquency rate remains an open question. There are also concerns that removing the income cap could allow higher-income individuals to access the loans, potentially diverting funds from low-income borrowers who need them most.

The FSC said the change is intended to ensure that people who suddenly need money due to a disaster or illness are not excluded solely on the basis of income. The commission said it would use in-person consultations to verify genuine need and would not extend support to higher-income applicants who can borrow from conventional financial institutions.

"The government needs to think harder about policies that help vulnerable people repay their debts and become financially independent," Park said.