Loans extended by consumer finance lenders through online loan brokerage platforms have fallen more than 40% this year as market interest rates climb. Funding costs are rising while lending rates remain capped by law at the statutory maximum, leaving lenders to serve only relatively creditworthy customers.
The average loan per borrower on unsecured consumer finance loans contracted between the 1st and the 14th of this month came to 3.09 million won, according to Finda, an online loan brokerage platform, on the 19th. Those borrowers had an average credit score of 607 and paid an annual rate of 20%. Finda currently works with 17 top-rated consumer finance lenders.
The volume of funds supplied by the consumer finance sector has been shrinking this year. In January, borrowers who took out unsecured loans from consumer finance lenders through Finda received an average of 5.29 million won. The per-borrower figure then fell to 4.78 million won in March, 4.9 million won in June and 4.63 million won in September, before contracting to 3.09 million won this month.
Borrower credit quality, by contrast, is rising quickly. The average credit score of borrowers taking unsecured loans from consumer finance lenders stood at 566 in January, 580 in March, 584 in June and 573 in September, then topped 600 this month. Funding costs have risen along with market rates, and customers who had used second-tier financial institutions have moved to consumer finance lenders amid regulatory curbs on household lending.
Consumer finance lenders said they have turned conservative as concerns about negative margins mounted following the Bank of Korea's rate increases. The cost structure of an unsecured consumer finance loan consists of funding costs of 7% to 9% — 5% to 7% for top-rated lenders — credit loss costs of about 10% and brokerage fees of about 2%. With the statutory rate cap limited to 20% and funding costs expanding, lenders say they have no choice but to focus on borrowers who carry relatively little default risk.
An official at a large consumer finance lender said margins are falling sharply. "We typically supplied more than 20 billion won in loans each month, but we recently cut our monthly supply to the 10 billion won range and are screening for safe borrowers," the official said.
Within the industry, major lenders are also said to be holding back on attracting new customers where possible and increasing the share of repeat customers with repayment records. That has prompted some to warn that the statutory rate cap could deepen financial exclusion for vulnerable groups during a period of rising rates. While the cap has helped ease excessive debt burdens for low-credit borrowers, it can become a factor in reducing the deployment of funds when rates rise. The statutory maximum rate, which began at 66% in 2002, was lowered to 39% in 2011 and 24% in 2018, and has stayed at 20% since 2021.
Market participants worry that if the credit scores of consumer finance customers become entrenched in the 600s, vulnerable borrowers scoring in the 500s or below could be pushed toward illegal lending. As of the end of March this year, 63% of borrowers in the consumer finance sector had credit scores in the 600s or below, according to NICE Information Service.
Experts say it is time to consider a rate cap linked to the base rate and a tiered cap that differs by sector. The idea is to build flexibility into the ceiling so low-credit borrowers are not pushed off a funding cliff. As of the end of last year, 731,000 people nationwide used consumer finance lenders. Kim Sang-bong, a professor of economics at Hansung University, said the business is already structured so that lenders cannot profit from unsecured lending. "For a sustainable ecosystem, we need to introduce a plan that differentiates the statutory rate cap between second-tier financial institutions and the consumer finance industry," the professor said.
Measures to ease the burden of funding costs are also needed. Rep. Kang Joon-hyeon of the Democratic Party of Korea said at a parliamentary audit of the Financial Supervisory Service on the same day that there is little difference in funding costs between top-rated consumer finance lenders and ordinary ones, and that support to reduce funding interest is needed.