Loan Interest Rate Calculation
Loan interest rates are determined by combining the base rate, margin rate, and preferential rate. Here's how they work:
1. Base Rate: This serves as the foundation for loan decisions at banks. COFIX (Cost of Fund Index) is commonly used for mortgage loans, while KORIBOR (Korea Interbank Offered Rates) is used for short-term loans.
2. Margin Rate: This is based on factors like an individual's credit score. Higher credit scores lead to lower margin rates, while lower scores result in higher margin rates.
3. Preferential Rate: Banks offer rate benefits to customers with good transaction records, such as those with high savings or credit card usage.
COFIX (Cost of Fund Index)
COFIX represents the average cost of funds from 8 banks and 8 types of funds.
- 8 Banks: Kookmin, Shinhan, Woori, KEB Hana, Nonghyup, KEB, SC First, Citi
- 8 Types of Funds: Regular deposit, regular installment savings, mutual funds, housing funds, transferable deposit receipts, conditional debt sale with redemption, bill of exchange discounting, subordinated debt excluding convertible bonds
Banks take funds saved by individuals or businesses (deposits) and lend them to those who need money (loans). The interest received from those loans is called "loan interest," part of which goes to the bank. The remaining interest is returned to savers (deposits) as "savings interest."
KORIBOR (Korea Interbank Offered Rates)
KORIBOR is the rate at which domestic banks lend to each other. It's derived from the highest and lowest rates among a total of 15 banks, including 7 commercial banks and 3 special banks. KORIBOR is announced at 11 AM every business day.
Types of Interest Rate Application
When choosing a loan product, borrowers can opt for three main types of interest rates:
1. Fixed Interest Rate: The interest rate at the time of signing remains constant until loan maturity.
2. Variable Interest Rate: The loan interest fluctuates based on the base rate during the loan period. It is adjusted every 3 or 6 months.
3. Mixed Interest Rate: A fixed interest rate is applied for a certain period before transitioning to a variable interest rate.
Choosing the right interest rate type depends on market predictions. Fixed rates are favorable when rates are expected to rise, while variable rates can save money on interest payments when rates are expected to fall.