Low-credit borrowers in South Korea are being pushed toward illegal finance as loan restrictions tighten and economic growth slows. A new study by the Korea Institute of Finance for Ordinary People estimated that the amount of money flowing into the illegal high-interest lending market in 2025 reached KRW 760 billion to KRW 1.55 trillion, about double the level a year earlier.
The study said some borrowers are carrying several debts from different sources at the same time, a pattern described as “five loans under one roof.”
Nearly 60% had been rejected by legal lenders
The institute surveyed 977 low-credit borrowers with credit ratings between grade 6 and grade 10 who had used legal lending companies or private borrowing channels within the past three years. It found that 59.4% had previously been turned down by legal lending companies.
The institute estimated that around 59,000 to 119,000 people moved into the illegal high-interest lending market in 2025 after being rejected by legal lenders. The total amount borrowed in those cases was estimated at KRW 760 billion to KRW 1.55 trillion, doubling from the previous year.
The study also said that 43 legal lending companies reporting data to South Korea’s credit rating agency NICE added about 196,000 new borrowers last year and issued around KRW 2.09 trillion in loans. As the government tightened lending restrictions on banks and the secondary financial sector, some borrowers who still had relatively better credit conditions also moved into the legal lending market, leaving weaker borrowers with even less room to access formal funding.
Approval rates fell to 9.1%
For low-credit borrowers in the bottom 50% by credit condition, the loan approval rate at legal lending companies fell to 9.1%, down another 0.5 percentage points from a year earlier.
At the same time, the share of rejected applicants who turned to illegal high-interest lenders rose from 5.2% to 7.5%. The study said that as financial institutions continue to tighten risk controls, the most vulnerable borrowers are the ones most likely to be excluded from the formal financial system.
Borrowing is going to survival, not spending
The survey found that borrowing by low-credit households was concentrated on basic survival needs. Some 41.0% of respondents said funds were used for basic living expenses, while 26.1% said they borrowed new money to repay existing debt.
That means more than two-thirds of loans were not used for consumption or investment. They were used to maintain daily life or to keep existing debt going, showing that many households have fallen into a rolling debt cycle.
Borrowers in their 20s were the most exposed
The study found that people in their 20s had the highest rate of using both legal lending companies and illegal high-interest lenders at the same time, at 8.9%. The report said this suggests younger borrowers, whose credit histories may still be thin and incomes unstable, are more likely to borrow from multiple channels at once when cash needs rise.
Many vulnerable borrowers did not realize lenders were illegal
Another finding was that many financially vulnerable people did not recognize that they were borrowing from illegal operators. The share of borrowers who said they knew they were using illegal high-interest loans and still chose to borrow fell from 77.7% in 2023 to 50.9% last year.
In other words, more borrowers are entering the illegal lending market without realizing it. The study said this was especially visible among financially vulnerable groups such as homemakers and part-time workers.
It also found that 55.8% of legal loan users could not tell from a company name alone whether the counterparty was a legally registered lender or an illegal lending group.