Interest Rates Surge for Overdraft Loans, Jumping from 4% to 7%

A borrower, identified as A, who took out an overdraft loan of 100 million won from a bank last September, was surprised to find that after extending the loan for another year, the interest rate had jumped from 4% to over 7%.

The impact of rising benchmark interest rates is increasing the financial burden on overdraft loan borrowers. The one-year financial bond rate, which serves as the basis for overdraft loan rates, has risen to around 3.90%, leading to increased margins at internet banks.

According to the Korea Federation of Banks on September 13, the average interest rate for new overdraft loans from the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) was 5.01% in July, up 0.50 percentage points from 4.51% in the same month last year.

During the same period, internet banks saw a sharper increase. The average interest rate for overdraft loans from three internet banks—Kakao Bank, K Bank, and Toss Bank—rose from 5.82% in July last year to 6.91% in July this year, an increase of 1.09 percentage points, which is about 2.2 times higher than the major banks. Kakao Bank led this increase, with its rate climbing from 5.75% to 7.74%, a rise of 1.99 percentage points.

Notably, the increase in rates for borrowers with mid to low credit scores was significant. The interest rate for Toss Bank borrowers with credit scores between 651 and 700 jumped from 6.41% in July last year to 10.47% in July this year, an increase of 4.06 percentage points. Similarly, Kakao Bank's rates for borrowers with scores between 701 and 750 rose from 6.99% to 8.86%, an increase of 1.87 percentage points.

The overall rise in overdraft loan rates is attributed to the increase in market interest rates following the benchmark rate hikes. The one-year financial bond rate (AAA-rated, unsecured) rose from 2.52% in July last year to 3.78% in July this year, an increase of 1.26 percentage points. It has since climbed to around 3.90% this month, prompting expectations of further increases in overdraft loan rates in September.

Additionally, internet banks have faced rising margins. The average margin for the three internet banks increased from 3.26% in July last year to 3.69% in July this year, a rise of 0.43 percentage points, while the major banks' margins decreased from 3.54% to 3.29%, a drop of 0.25 percentage points.

This trend is interpreted as a result of internet banks catering more to mid to low credit borrowers, which has lowered their average credit scores. In fact, Kakao Bank, which experienced the largest rate increase, reported that the average credit score of new overdraft loan borrowers in July was 862, down 65 points from 927 in the same month last year.

A representative from Kakao Bank explained, "We operate separate emergency loan products for mid to low credit borrowers, so when the average credit score decreases, the average interest rate tends to rise as well."