Strapped college students turning to loan sharks for help

A university junior in Seoul has made a daily wire transfer of 20,000 won (18 U.S. dollars) at 3 p.m. since Feb. 10. He will do this for 17 more days. If he misses even one payment, his debt will snowball.

The student is repaying the principal and interest for 1 million won (880 dollars) he borrowed from a loan shark. The student borrowed more than 10 million won (8,800 dollars) for tuition from the government in his freshman and sophomore years but failed to pay monthly interest of 80,000 won (70 dollars).

He could not turn to his parents since they must pay more than 10 million won a month of the principal and interest for a bank loan of 1 billion won (880,000 dollars) used to open a restaurant.

The student has worked part-time but cannot pay interest as he has nothing left after paying monthly rent of 380,000 won (335 dollars) and living expenses. With his credit rating plummeting, he failed to borrow enough to pay tuition from the government this year.

Savings banks also refused to lend him money since he had taken out a loan of 3 million won (2,640 dollars) for tuition.

He worked part-time to earn tuition for the first semester this year, but was short 1 million won. When the deadline for tuition payment approached, he saw an ad from a loan shark and called him. “If you repay your debt every day, you will have less of a burden and it’s like saving money,” the loan shark said.

The loan shark then went to the student`s home and gave him 900,000 won (793 dollars) after subtracting 100,000 won (88 dollars) in travel expenses and handling fees. “It’s okay if you pay back 1.3 million won (1,145 dollars) within 65 days,” he said, adding, “If you repay 1.2 million won (1,057 dollars) by giving 20,000 won every day without skipping, I can exempt five days.” The lender said, however, “If you miss one day of interest payment, I will add the unpaid interest to the principle.”

This sounded attractive but the loan turned out to have an annual interest rate of 225 percent. To repay the money, the student is tutoring three elementary school students to earn 600,000 won (528 dollars) and working at a bar from 8 p.m. to 5 a.m. from Friday through Sunday to earn 162,000 won (143 dollars).

“The money from the bar goes to the interest and I have to keep tutoring because of living expenses,” he said, adding, “I fear that I`ll have no balance in my bank account."

Internet portal sites have had many posts complaining about the difficulty of borrowing money, with one saying, “Now student loans and loans from savings banks are unavailable. I have to attend academies and need living expenses. Let me know of a money lender who collects via daily installments.”

Loan sharks add replies to such a posting to lure innocent students. A search for the keywords “college student daily installment” on a portal site attracts plenty of private lenders.

A Dong-A Ilbo reporter called loan sharks by disguising himself as a college student. Most of them said that for a loan of 1 million won, the repay value would be 1.2 million to 1.4 million won (1,057 to 1,233 dollars) as daily installments over 45, 65 or 85 days but gave no information on handling fees and overdue interest. They simply urged the reporter to meet first and talk.

Most college students who turn to loan sharks are delinquent borrowers who cannot borrow tuition money from the Korea Student Aid Foundation or savings banks.

According to the data that Rep. Park Joo-sun of the main opposition Democratic United Party obtained from the foundation, the number of delinquent college student borrowers last year was 32,902 last year, up 6,702 from 26,200 in 2010. Some of them borrowed money from private lenders.

A foundation source said, “Though students have become delinquent borrowers due to overdue interest, they can borrow tuition through a re-examination if their grades exceed a certain level,” adding, “Before resorting to private lenders and daily installments, we recommend that they ask for help from the foundation first.”

hjson@donga.com mck@donga.com