30-something office worker A recently opened an overdraft account, borrowing 30 million won to invest in stocks for marriage and housing. While he has made profits from his overdraft investments so far, he faces the pressure of consistently earning more than the monthly interest payments of 120,000 to 150,000 won. Any slight fluctuation in stock prices increases his anxiety.
As the stock market thrives, more individuals are turning to investment borrowing. It has become common for young people to have at least one overdraft account, as it offers a convenient way to secure investment funds when cash is low. As of the end of May, the total overdraft limit in South Korean banks reached a staggering 130 trillion won.
The primary advantage of overdraft accounts is their convenience. Unlike standard loans, users can withdraw only the amount they need from a pre-approved limit and pay interest only on that amount. For instance, if a user has a limit of 30 million won but only uses 5 million won, interest is charged only on the 5 million won. There are no early repayment fees, and the limit is restored once the borrowed amount is repaid.
However, overdraft accounts are not without their risks. Although they may seem like readily available funds, they are still loans. Using them without a plan or leaving them unused for extended periods can lead to unexpected risks. Setting an excessively high limit or using the account for a long time can negatively impact credit scores. Overdraft accounts often have higher interest rates than standard loans, and prolonged use increases the interest burden. Failing to make timely interest payments can result in late fees and a drop in credit scores.
When seeking additional loans, having an overdraft account can also be disadvantageous. Even if the actual amount borrowed is low, financial institutions often consider the overdraft limit as potential debt when calculating loan eligibility. This could mean lower limits for mortgage or other credit loans. Recently, stricter regulations on the debt service ratio (DSR) have also made overdraft limits a factor in loan assessments.
Therefore, it is crucial to consider a repayment plan when opening an overdraft account. Since overdrafts allow for flexible repayment, it is easy to fall into a pattern of paying only interest while leaving the principal untouched. However, if a credit score drops or income decreases at the time of annual renewal, the limit may be reduced or renewal denied. If renewal is denied, borrowers must repay the outstanding loan quickly, making it essential to use overdrafts cautiously, taking repayment ability into account.
* This article has been translated by AI.
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