Illegal Loan Sharks Charge 128% Interest Rates, Preying on Low-Income Workers

Illegal private lending in South Korea carries an average annual interest rate of 128%, according to a Financial Supervisory Service investigation obtained by The Seoul Economic Daily.

The FSS estimates the illegal private lending market reached 11.9 trillion won ($8.3 billion) with 951,000 borrowers as of end-2024. The number of users surged 11.4% from 854,000 the previous year.

The market has expanded dramatically since the government lowered the legal maximum interest rate from 24% to 20% in July 2021. Since then, the market has grown 68% from 7.1 trillion won in 2018, while users have jumped 132% from 410,000.

Low-income and low-credit borrowers dominate the market. The survey found 55.4% of users had monthly household incomes below 3 million won. Day laborers accounted for 34.0% of borrowers, followed by self-employed individuals at 26.8%.

Men comprised 61.4% of users, with those in their 60s (28.2%) and 50s (23.7%) making up more than half. About 55.1% said they turned to illegal lenders after failing to borrow from friends, family, or acquaintances.

"Credit card payment needs were the most common reason across all age groups," the FSS said. "Those in their 20s and 30s showed high demand for investing in stocks and cryptocurrencies."

The FSS calculated the average interest rate at 127.9%, with some cases reaching 2,173%. This far exceeds the 60% annual threshold under the Licensed Lending Business Act, above which principal and interest payments become legally void. About 11.5% of borrowers experienced illegal collection practices, including nighttime debt collection and disclosure of debts to family members.

The findings confirm concerns that lowering the legal maximum rate has backfired. Savings banks and licensed lenders have reduced loan supply, citing deteriorating profitability.

"Operating costs keep rising while the maximum rate keeps falling," one lending company executive said. "We have no choice but to cut unsecured loans and focus on secured lending."

Reports to the FSS illegal lending hotline rose from 10,350 in 2022 to 14,786 in 2024 and 16,988 last year. Authorities say underground operations are proliferating, including fraudulent schemes using registered lenders' names.

"Weak domestic consumption last year likely pushed more self-employed workers seeking emergency funds toward illegal lenders," a financial industry official said.

Industry observers argue the data supports expanding licensed lending businesses to protect vulnerable borrowers.