Household debt fuels concern over South Korea interest rates

U.S. President Donald Trump has complained that benchmark interest rates are too high. South Korean presidents are highly sensitive to market rates because the country faces a massive household debt problem. Household debt exceeded 1,000 trillion won at the end of 2013 and had swelled to a record 1,968 trillion won by the end of September. The slowdown in growth from the June 27 real estate loan regulations offers only limited relief. Given past failures in managing household debt, it is natural that former presidents have been concerned about the impact of interest rates on ordinary citizens.

Former President Moon Jae-in, speaking at a Cabinet meeting in March 2021 when household debt had surged 155 trillion won in a single year due to the COVID-19 pandemic, highlighted a “structural contradiction in which people with high credit enjoy lower interest rates while those with poor credit face higher rates.” While this may seem contradictory from a political perspective, in financial markets that rely on credit, assessing the risk of counterparties is standard practice.

The same principle applies to nations. Following Moon’s logic, if a country with poor credit argued that it was a “structural contradiction” to face higher interest rates, international financial markets would refuse to lend to it. If such political rhetoric were effective, the 1997 foreign exchange crisis would not have occurred.

Former President Yoon Suk-yeol criticized high interest rates while the Bank of Korea was raising benchmark rates to absorb excess liquidity and stabilize prices. He used strong terms such as “servile banks,” “abuse of power,” and “monopoly.” At the time, when Financial Supervisory Service Chief Lee Bok-hyun pressured banks to lower rates, loan rates fell and mortgage borrowing surged. As a result, interest rates and household debt moved in the opposite direction during a period that required debt reduction.

President Lee Jae-myung, who took office during a low-growth phase with barely 1 percent economic growth, has expressed a perception linking interest rates to income, similar to former President Moon. On Nov. 13, speaking at a senior aides meeting, Lee said, “The current financial system forces poor people to pay high interest rates,” and questioned whether it had become a “financial class system.” Not all low-income households face high interest rates. Rates vary according to credit. Rep. Cheon Ha-ram of the Reform Party noted that 2.02 million low-income individuals have high credit, challenging the notion that low income automatically means high interest rates.

If concerns about a financial class system are valid, the focus should be on managing economic inequality caused by disparities in access to financial services rather than on interest rate gaps. Recent lending regulations evaluate borrowers’ repayment ability based on income. During real estate and stock market upswings, high-income households can borrow from financial institutions to invest and grow wealth, while low-income households often struggle to access bank financing. Policymakers must manage asset markets to prevent bubbles while ensuring that low-income, high-credit individuals are not excluded from financial opportunities.

According to the 2024 Household Finance and Welfare Survey by the National Data Office, 80 percent of households with financial debt said they could repay their loans on time, while 4.5 percent said repayment was impossible. Measures should offer opportunities for debt restructuring for those struggling, without undermining the efforts of the 80 percent who are repaying.

Despite presidential concern, ordinary citizens continue to face high interest burdens. The underlying issues of low growth and high household debt remain unresolved. Among households with financial debt, 46.2 percent cited real estate purchases, including homes and rental deposits, as the main reason for increased debt after one year, while 18.5 percent pointed to living expenses. Even if banks are pressured to create funds for a bad bank to restructure long-term defaulters’ debt, without policies stabilizing real estate and jobs, defaulters risk falling back into debt. These challenges cannot be shifted solely onto banks or financial authorities. Particularly now, it is crucial to guard against excessive leverage, liquidity, and investment mania, known as the “three Ls,” that could amplify interest rate pain. Political rhetoric blaming interest rates is no longer useful.