Recently, secondary financial institutions such as savings banks and capital companies have been rolling out auto title loans one after another. As the government tightens real estate lending regulations, bank loans have been blocked and even card loan limits have been cut, opening a niche. Some financial firms lend up to three times the market price of a used car, drawing criticism that the risk of future defaults is high. Auto title loans from secondary financial institutions are classified as other collateral loans, so household loan regulations such as the debt service ratio (DSR)—the ratio of all loan principal and interest payments to annual income—do not apply.
According to the financial sector on the 4th, SBI Savings Bank recently launched an auto title loan for the first time in 10 years. It lends up to 100 million won at an annual rate of 6.9% to 18.9%. Dongwon Jeil Savings Bank also plans to launch an auto title loan this month at an annual rate in the 13% range.
Among savings banks, seven offer auto title loans: OK, Pepper, Sangsangin, Smart, Kiwoom, Kiwoom YES, and Dongwon Savings Bank. With SBI and Dongwon Jeil joining, the number of savings banks offering auto title loans has increased to nine. The capital industry and Fintech firms are also strengthening auto title loan products. Finda, a loan brokerage platform, brokers a total of 37 auto title loan products from 27 companies.
Auto title loan limits are set based on an individual's credit score plus the collateral value of the car they own. Used cars and installment-purchase cars are included, and borrowing at a relatively higher limit is possible even with existing loan history. Because there is collateral, the screening threshold is lower than for unsecured loans.
As the threshold for bank loans rises, a balloon effect is emerging with a surge in auto title loan applications. According to data submitted by the office of People Power Party lawmaker Kim Sang-hoon to the Financial Supervisory Service, over about two months after the June 27 regulations took effect, savings banks received a total of 248,000 personal auto title loan applications. That is about 2.5 times the average of 2,230 daily applications from January to May before the lending rules.
There is criticism that auto title loans carry high interest rates and allow borrowing up to two to three times the collateral value, raising the risk of defaults. Auto title loans are often sought by people with low credit who cannot obtain loans in the formal sector or by those who already have many loans and are seeking to borrow more.
A savings bank official said, "Among borrowers, there are many cases of taking out an auto title loan to repay card loans or loans from lending businesses," and added, "Because these borrowers took out an auto title loan as a last resort, there is a high likelihood it will lead to default."