A 40-year-old man in the livestock distribution business turned to illegal lending as his financial situation worsened due to management difficulties. He borrowed a total of 15 million won from seven lenders. The repayment structure required him to pay back the principal and high-interest rates in a short period, but after some repayments were delayed, he faced threats and verbal abuse. Eventually, he sought help at the Financial Supervisory Service's illegal lending victim reporting center and received one-stop support counseling from the Credit Recovery Commission.
As the economy falters, the number of loans taken out by individuals in their 30s and 40s who transitioned from employment to self-employment has significantly increased. With more people entering self-employment while carrying debt, concerns are growing that rising benchmark interest rates could further strain their initial business funding.
According to data from the loan comparison and brokerage platform Finda, 1,461 individuals who switched from being employees to self-employed took out loans in the first half of this year, a 42.5% increase from 1,025 during the same period last year.
Among these borrowers, 40.2% were in their 40s, followed by 29.3% in their 30s. Seven out of ten individuals who took out loans after transitioning to self-employment were in their 30s and 40s.
The increase in loan amounts outpaced the growth in the number of borrowers. In the first half of this year, 1,016 individuals in their 30s and 40s who transitioned to self-employment took out loans, a 42.9% increase from the previous year. The total loan amount they agreed to rose from 10.5 billion won to 15.54 billion won, marking a 48.0% increase. The average loan amount per person also increased by 3.4%, from approximately 14.79 million won to 15.30 million won.
While Finda's data does not clarify the reasons behind these individuals' transitions to self-employment or the purposes of their loans, it is evident that the number of borrowers in their 30s and 40s has surged over the past year.
The challenge is that the business environment for self-employed individuals is poor. According to the Ministry of SMEs and Startups, the Business Sentiment Index (BSI) for small business owners was only 55.6 in July. A BSI below 100 indicates that more business owners view the economy negatively than positively. The outlook BSI for August also dropped by 6.3 points to 71.0 compared to the previous month.
Existing debts among vulnerable self-employed individuals are also rising rapidly. The loan balance for these individuals increased by 56.6% over four years, from 74.7 trillion won at the end of 2021 to 117 trillion won by the end of the first quarter of this year. This indicates that the debt burden on vulnerable self-employed individuals has more than doubled during the prolonged economic recovery.
Additionally, the recent increase in benchmark interest rates compounds the issue. The Bank of Korea raised the benchmark interest rate from 2.50% to 2.75% in July and then to 3.00% this month, marking a 0.25 percentage point increase. With two consecutive months of rising benchmark rates, there is growing pressure for personal business loan rates, which are linked to market rates, to also rise.
Self-employed individuals face greater income volatility than wage workers and must continue to bear fixed costs such as rent, labor, and materials. Borrowers who utilize loans from the outset of their businesses must repay principal and interest monthly, even if their sales do not meet expectations. The simultaneous occurrence of economic downturn and rising interest rates can quickly worsen their financial situations.
Some borrowers unable to secure additional funds from formal financial institutions may be at risk of turning to illegal lending. From February 23 to this month, a total of 640 individuals utilized the Financial Services Commission's 'One-Stop Comprehensive Support System for Illegal Lending.' Among them, 29.2% were in their 40s, and when combined with those in their 30s, they accounted for 56.6% of the total.
A financial industry official stated, "When interest rates rise, the interest burden on self-employed individuals with existing loans increases, and their repayment capacity may decline. If their creditworthiness deteriorates and they cannot secure additional funds from financial institutions, some borrowers may be pushed into illegal lending."
* This article has been translated by AI.
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