Limited-Time Low Interest Loans Cost More in End

A 40-year-old homemaker, identified by her surname, Kang, who lives in Bongcheon-dong (Gwanak-gu, Seoul), was interested in a long-term bank loan of 100 million won to purchase an apartment, so she compared loan rates between banks early this month.

Two loan programs caught Kang’s eyes: long-term loans from bank A and B that take house property as security. Bank A offers a 5.81-percent annual interest rate, but it gives a 0.4-percent discount for the first six months. Bank B offers a 6.11-percent annual rate with a 0.7-percent discount for the first year.

Bank C, whom Kang has been using mostly so far, has a mortgage program offering an annual rate of 5.70 percent. The rates offered by the other two banks are lower by 0.29 point. However, Bank C’s loan costs less if Kang borrows the money for 15 years.

--Limited-time low-interest loans are loss to customers

The initial rate of Bank A is 5.41 percent during the first six months, but 5.81 percent will be applied for the following 14 years and six months. The annual average for 15 years ends up as 5.80 percent.

The rate offered by Bank B is 5.41 percent in the first year, but the following 14 years it will be 6.11 percent, making the annual average 6.06 percent.

For an initial period, Bank A and B are offering lower rates than the one offered by Bank C by 0.29 point. However, the rates go up after the initial promotion period, erasing the benefits of the introductory rates.

In fact, if Kang receives a 100-million-won loan from Bank A, the annual interest she has to pay is 5,796,600 won on average, and the total interest amounts to 86,949,000 won at the end of the fifteen years. If Kang chooses Bank B, the annual interest to pay is average 6,063,300 won and the total interest is 90,949,500 won. These are 1,450,000 won and 5,450,000, respectively, more than the total interest, 85,500,000 won, to pay Bank C.

Banks explain that these conditional discount rate loan programs may be beneficial to those who don’t have enough spare funds because they can be less burdened in the initial period of the loan.

-- Even time installment savings programs advertising best rates need to be carefully calculated

Time installment savings programs are the same, in that they also offer an attractive rate during the initial promotion period to attract customers. Bank D promotes its time installment savings program as offering the best annual rate of 4.25 percent (based on the rate on July 1). However, this program guarantees the best rate only in the first month of the loan. Then, every three months, the rate goes down, first to 3.85 percent, then 3.8 and 3.5 percent, and over the last two months, down to 3.35 percent. The annual rate of this savings program averages down to 3.7 percent.

This bank attaches an ambiguous condition, saying, “Applying different interest rates by payment” in their promotion of this savings program. It is, however, not easy for a customer to know that this means a floating rate that goes down every three months.

Dr. Choi Kong-phil at the Korea Institute of Finance, points out that “it is wise to calculate the average rate when a program offers varying interest rates.”

Chang-Won Kim changkim@donga.com