Banks Absorbed 80% of Rate Cuts via Higher Add-Ons
Benchmark rates fell by 0.72 points, but borrowers saved only 0.15 points as banks raised net add-ons.
The average benchmark interest rate for household loans at 14 major Korean banks dropped by 0.72 percentage points over three years. Despite this decline, the actual interest rates paid by borrowers fell by only 0.15 percentage points. This means that less than one-fifth of the potential savings were passed on to consumers. The gap was filled by a sharp increase in the net add-on rate, which rose by 0.57 percentage points during the same period.
Data reviewed by GN auto markets/bonds: interest rates shows that the five largest lenders increased their net add-ons by 0.72 percentage points. Their actual loan rates decreased by just 0.08 percentage points. In the past year, both benchmark rates and net add-ons have risen, pushing actual borrowing costs up by 0.53 percentage points. This trend suggests that regulatory caps on loan supply have increased banks' pricing power.
Net add-ons offset most rate cuts
The average benchmark rate at the 14 tracked banks fell from 3.82% in August 2023 to 3.10% last month. Actual loan rates only declined from 5.68% to 5.53% over that period. The net add-on rate, calculated as the spread minus preferential adjustments, increased from 1.86% to 2.43%. Eleven of the 14 banks raised their net add-ons, with Jeonbuk Bank seeing the largest jump of 1.24 percentage points.
Regional banks face higher pricing power
Banks attribute the rise in add-ons to higher credit risk costs and operational expenses. Regional banks, which lend more to lower-credit borrowers, recorded larger increases in net add-ons. IBK Industrial and Gwangju Banks each raised their rates by over one percentage point. Only three banks, including Gyeongnam and Busan, managed to lower their net add-ons during the three-year span.
Recent trends reverse earlier savings
In the last twelve months, market conditions have shifted against borrowers. The average benchmark rate rose by 0.39 percentage points since August 2025. The net add-on rate increased by an additional 0.14 percentage points. Consequently, the actual loan rate jumped from 5.0% to 5.53%. This combined increase of 0.53 percentage points erases the minor gains seen in the earlier part of the three-year period.
