To manage our financial assets, we make financial transactions. In this process, it’s important to understand and manage interest rates and overdraft contracts. Interest rates affect the growth of assets, determining the rate of return for depositors and the interest burden for borrowers. In addition, in financial transactions between individuals, it is necessary to clarify the lending agreement under the Civil Code to clarify each other’s rights and obligations.
We engage in financial transactions to manage financial assets, which are cash, deposits, and securities. Financial transactions occur frequently between individuals and financial institutions, as well as between individuals and individuals. These transactions play an important role in our lives and are the backbone of economic activity.
First, let’s look at transactions between individuals and financial institutions. When dealing with financial institutions, it’s important to pay attention to the interest rate. Interest rates are the ratio of interest to principal, determined by the supply and demand of funds, and are an important factor that affects the growth and decline of assets. From a depositor’s point of view, the same amount of money will earn different returns depending on how the interest rate is calculated: simple or compound. Simple interest only pays interest on the principal, while compound interest pays interest on both the principal and the interest. For example, if you deposit KRW 10 million for two years at 5% interest per annum, you will earn KRW 500,000 per year in simple interest. However, with compounding, the first year’s interest would be 500,000 won, but the next year’s interest would be 525,000 won by applying a 5% interest rate to 10.5 million won, which includes the first year’s interest. In other words, if the interest rates are the same, the difference between simple and compound interest will increase as the principal amount increases and the time period increases.
Inflation can be an important factor when determining the actual return from an interest rate. The interest rate that does not take inflation into account is called the nominal interest rate, and the interest rate that takes inflation into account and subtracts inflation from the nominal interest rate is called the real interest rate. For example, if Chulsoo deposits 1 million won at 10% per annum, the total principal amount including interest will be 1.1 million won after one year. However, if the inflation rate is 10%, the value of the total principal will be the same as the value of the principal a year ago, so the nominal interest rate is 10%, but the real interest rate is 0%.
Interest rates are important not only for depositors, but also for people who borrow money from financial institutions. When you borrow money, you pay interest on the loan, and usually when interest rates rise, so does the interest on the loan. Therefore, to reduce the interest burden, you should consider fixed versus variable interest rates. A fixed rate means that the interest rate does not change during the term of the loan, while a variable rate means that the interest rate keeps changing with appropriate rate adjustments. The adjustment of the interest rate is based on a variety of factors, and some financial institutions determine the variable rate based on their own calculated funding costs. However, most financial institutions set their rates based on the benchmark interest rate published by the Bank of Korea. The base rate is artificially determined monthly by the Bank of Korea’s Financial Services and Monetary Affairs Committee to control the amount of money in the market. If the economy is overheating and there is a risk of inflation, the base rate is raised to stabilize the economy, and if there is a risk of economic contraction, the base rate is lowered to stimulate the economy. When the key interest rate changes, it affects the interest rates of financial institutions, making the interest burden of those who borrow money at variable rates either higher or lower.
Financial transactions are not only between individuals and financial institutions, but also between individuals. In order to prevent conflicts that may arise, the Civil Code regulates contracts that involve money, i.e., lending money. A contract that involves the lending of money is defined as a money lending contract and specifies the relevant contents. The agreement between the lender and the borrower is prioritized by the agreement between the lender and the borrower, but there are a few things to note.
First, the creditor and debtor must agree on interest. If there’s no agreement on interest payments, then there’s no interest, but if there is an agreement on interest payments but no interest rate, then the statutory interest rate of 5% per annum applies. Second, the agreement must specify the personal and physical collateral that the creditor requires in case the debtor fails to repay. The creditor can require both personal and physical collateral: personal collateral is the provision of a guarantor who will pay the money on your behalf, and physical collateral is the provision of an object that can be disposed of in lieu of the debt. Physical collateral must be disposed of by the creditor, so it must belong to you or, if it belongs to someone other than you, you must get a promise from the owner to dispose of it. Third, you need to agree on a date to repay the money. If you agree to meet in person, but the creditor deliberately fails to show up or refuses to accept the money, you can utilize a garnishment system even if there is no prior agreement. A garnishment is when a debtor leaves money or securities in a court depository. This has the same effect as paying the money on the same day, avoiding disputes over the timing of repayment.
With a consumer loan, the contract expires when the borrower pays back the money. If you don’t pay back the money, the creditor can cancel the contract or enforce the debt through enforcement. To help debtors who have more debts than assets and are unable to repay their debts, the court implements the personal recovery system and personal bankruptcy system under the Debtor Recovery and Bankruptcy Act, both of which require a court to confirm that the debtor is unable to repay the debt. In the case of personal rehabilitation, the debtor can apply for personal rehabilitation if he or she has a steady income, and the remaining debts are discharged after five years of repaying the amount set by the court, excluding minimum living expenses, from the income at the time of applying for personal rehabilitation. However, if you don’t have a steady income, you can file for personal bankruptcy. In this case, the debtor must first file a bankruptcy petition with the court, and the court will declare the debtor bankrupt and discharge all debts. Although this system can relieve the burden of excessive debt, the burden on the debtor and his or her loved ones is enormous, and even after the discharge, it can be difficult to live a normal economic life, such as being penalized for credit transactions with financial institutions.
When it comes to financial transactions, managing financial assets is crucial. In addition to managing your financial assets, it’s important to have a clear understanding of the terms and procedures of financial transactions in order to maintain a healthy financial position. When dealing with financial institutions, it’s important to pay close attention to interest rates, and when dealing with individuals, it’s important to follow legal procedures to clarify each other’s rights and obligations. It is also important to be flexible and adaptable to changing economic conditions. This will help you maintain your financial stability and realize your financial freedom.
