Internet Bank Broadens Policy Financing with Increased Interest Rates for Low-Credit Borrowers

Internet Banks Boost Lending to Middle and Lower-Income Borrowers, But Rates Remain Higher

South Korean internet banks are actively expanding their reach to middle and lower-income consumers, especially through government-backed policy financial products. Tosbank and Kakao Bank are leading this charge, offering a suite of products designed to support a broader segment of the population.

Tosbank boasts a diverse portfolio of policy finance products, including “Sunshine 15,” “Sunshine Bank,” “Siddol loan,” and “Sunshine Loan Youth.” The “Sunshine Bank” product alone has seen critically important uptake, with an estimated 1.3 trillion won supplied and 135,000 customers acquired within its two years of operation.

Kakao Bank is also making strides, currently offering “Sunshine 15” and “Sunshine Bank,” launched in April. Sence its 2020 introduction,”Sunshine 15″ has accumulated approximately 340 billion won. With the upcoming launch of “New Hope Hall” in the latter half of the year, Kakao Bank is set to become the first internet bank to offer all three major government-backed policy finance products.

Beyond these specific programs, both Tosbank and Kakao Bank are consistently increasing their general lending to middle and lower-credit individuals. Adhering to the financial authorities’ 30% target for mid-to-low credit loans, kakao Bank achieved 33.7% in the first quarter, closely followed by Tosbank at 30.4%. While K-Bank’s share was slightly lower at 26.3%, its contribution to the total loan balance was the highest among the three, at 35%.

To further bolster their capacity to serve this demographic, all three internet banks are investing in their proprietary credit scoring systems (CSS) and enhancing their technological infrastructure. Kakao Bank is leveraging unstructured data through its “Kakao Bank Score,” while K-Bank is implementing its CSS 3.0 system for more refined evaluations. Tosbank is also working on improving its assessment models using alternative data and implementing programs to manage delinquent debts.

However, when it comes to general credit loans outside of policy initiatives, these internet banks are still facing a pricing challenge compared to customary commercial banks. Data from the Banking Federation reveals that in July, the average interest rate spread for major commercial banks KB Kookmin, Shinhan, Woori, and Hana was 1.51%, with loan rates ranging from 4.32% to 4.53%. In contrast,the average rate spread for K-Bank (2.46%), Kakao Bank (1.98%), and Tosbank (2.54%) was a higher 2.33%, approximately 0.82 percentage points above commercial banks. Their average loan rates also fell higher, between 4.62% and 5.15%.

An executive from one of the internet banks noted this trend, stating, “We have gradually reduced the proportion of mortgage loans as the first half of the year, focusing more on personal credit loans for middle and low-credit customers. This trend is expected to continue in the second half.” This strategic shift underscores the internet banks’ commitment to expanding their customer base among those with lower credit scores.

How might the increased APRs on policy loans affect a borrower’s ability to maintain their life insurance coverage?

The Shift in Fintech Lending: A New Approach to Accessibility

Ally Bank, a leading internet bank, announced today a important expansion of its policy financing options, specifically targeting borrowers with low credit scores. This move, effective August 1st, 2025, centers around increased interest rates offered on secured personal loans backed by existing life insurance policies. the initiative aims to provide a viable loan option for individuals traditionally underserved by conventional lending institutions. This represents a growing trend in fintech lending – a move towards more inclusive financial products, albeit with adjusted risk pricing.

Understanding Policy Loans & The New Rate Structure

Policy loans allow policyholders to borrow against the cash value of their life insurance policies. Unlike conventional loans, they don’t require credit checks in the same way, making them attractive to those with bad credit history or limited credit access. Ally Bank’s new policy focuses on increasing the competitiveness of these loans, but with a corresponding adjustment to APR (Annual Percentage rate).

Here’s a breakdown of the new rate structure (as of 2025/08/01):

Credit Score 580-619: APR ranging from 12.99% – 18.99% (previously 10.99% – 15.99%)

Credit Score 620-659: APR ranging from 9.99% – 14.99% (previously 8.99% – 12.99%)

Credit Score 660+: APR ranging from 7.99% – 12.99% (remains largely unchanged)

These rates are secured by the cash value of the whole life insurance or global life insurance policy. It’s crucial to understand that while the loan is secured, failing to repay it could reduce the death benefit or even lapse the policy. Loan terms typically range from 1 to 5 years.

Why the Rate Increase for Lower Credit Tiers?

The increase in interest rates for borrowers with lower credit scores is a direct response to increased risk assessment. While policy loans are secured, the risk of policy lapse due to non-repayment still exists. Ally Bank cites a recent increase in policy lapses among borrowers with sub-620 credit ratings as a key factor in the rate adjustment.

This aligns with broader industry trends. Credit risk is a primary driver of loan pricing, and fintech companies are increasingly utilizing elegant credit scoring models to accurately assess and price risk. The bank emphasizes that the higher rates allow them to extend financial inclusion to a wider audience while maintaining financial stability. Debt consolidation is a common use case for these loans.

Benefits of Utilizing Policy Loans with Ally Bank

Despite the increased rates, policy financing through Ally Bank offers several advantages:

Accessibility: A viable option for those denied traditional loans due to poor credit.

No Credit Check (Beyond Policy Qualification): The primary approval factor is the cash value of the policy,not the borrower’s credit report.

Competitive Rates (Compared to Payday Loans): While higher than rates for excellent credit,these loans are generally more affordable than payday loans or title loans.

flexibility: Borrowers can choose their repayment schedule within the defined loan term.

Tax Advantages: Interest paid on policy loans may be tax-deductible (consult a tax advisor).

Real-World Example: Sarah’s Story

Sarah, a single mother with a credit score of 590, needed $5,000 for emergency home repairs. She was repeatedly denied personal loans from traditional banks and credit unions. She had a $20,000 whole life insurance policy with a ample cash value. Ally Bank’s new policy financing option allowed her to secure the funds at a rate of 16.99%, significantly lower than the rates offered by short-term lenders. She used the funds to repair her roof, avoiding further damage and ensuring a safe living habitat for her family. This demonstrates how alternative financing can bridge the gap for underserved borrowers.

Important Considerations & Practical Tips

Before taking out a policy loan, carefully consider the following:

1. Policy Impact: Understand how the loan and its repayment will affect your policy’s death benefit and cash value.
2. Repayment Ability: Ensure you can comfortably afford the monthly payments to avoid policy lapse.
3. Compare Options: Even with bad credit, explore all available loan options, including credit union loans and online lenders.
4. Read the Fine Print: Thoroughly review the loan agreement, paying attention to fees, penalties, and default terms.
5. Credit Counseling: If you’re struggling with debt, consider seeking guidance from a non-profit credit counseling agency.

The Future of Inclusive Lending & Fintech Innovation

Ally bank’s move signals a broader trend towards more inclusive financial products. Fintech companies are leveraging technology and data analytics to assess risk more accurately and offer tailored solutions to a wider range of borrowers. Expect to see further innovation in alternative credit scoring and loan products designed to address the needs of the underbanked and credit-challenged populations. Small dollar loans and secured credit cards are also likely to see increased innovation in this space. Financial literacy will be key to ensuring borrowers understand the terms and risks associated with these products.