Financial transactions are a crucial process for managing our assets. We explore how to understand core financial principles like interest rate changes, loans, and deposits, and safely utilize them.
We engage in financial transactions to manage financial assets, which include cash, deposits, and securities. These transactions occur not only between individuals and financial institutions but also frequently between individuals themselves. Such transactions play a vital role in our lives and form the foundation of economic activity.
First, let’s examine transactions between individuals and financial institutions. When dealing with financial institutions, it’s crucial to carefully consider interest rates. Interest rates refer to the ratio of interest to principal. They are determined by the supply and demand for funds and are a crucial factor influencing the growth or decline of assets. From the depositor’s perspective, even when depositing the same amount, the rate of return differs depending on the type of interest applied—whether it is simple or compound. Simple interest accrues only on the principal, while compound interest accrues on both the principal and the accumulated interest. For example, depositing $1,000 at a 5% annual interest rate for two years yields $50 in simple interest each year. However, with compound interest, the first year’s interest is $50, but the second year’s interest is calculated on the total of $1,050 ($1,000 + $50), resulting in $52.50 in interest. In other words, with the same interest rate, the difference in the final amount between simple and compound interest grows larger as the principal increases and the period lengthens.
When judging the actual rate of return due to interest rates, the inflation rate can be an important factor. The interest rate without considering inflation is called the nominal interest rate, and the interest rate after subtracting the inflation rate from the nominal rate is called the real interest rate. For example, if Chul-soo deposits $100 at an annual interest rate of 10%, the total amount of principal and interest after one year will be $110. However, if the inflation rate is also 10%, the value of the total principal and interest becomes equivalent to the value of the original principal one year ago. Therefore, while Chul-soo’s nominal interest rate is 10%, his real interest rate is 0%.
Interest rates matter not only to depositors but also to those borrowing money from financial institutions. Borrowing money incurs loan interest, and generally, when interest rates rise, loan interest also increases. Therefore, to reduce the interest burden based on interest rates, one must consider fixed and variable rates. A fixed rate remains unchanged throughout the loan period, while a variable rate continuously adjusts based on appropriate interest rate changes. Interest rate adjustments are influenced by various factors. Some financial institutions determine variable rates based on their own calculated funding costs. However, most financial institutions set their rates reflecting the base rate announced by the Bank of Korea. The base rate is artificially set monthly by the Bank of Korea’s Monetary Policy Board to regulate the money supply. If there are concerns about inflation due to an overheated economy, the base rate is raised to stabilize the economy. Conversely, when there is concern about an economic downturn, the benchmark rate is lowered to stimulate the economy. Changes in the benchmark rate affect the interest rates set by financial institutions, causing the interest burden for borrowers with variable-rate loans to increase or decrease.
Financial transactions occur not only between individuals and financial institutions but also between individuals themselves. To prevent potential conflicts arising from such transactions, the Civil Code defines contracts involving the lending of money as consumer loans and specifies relevant details. Consumer loan contracts prioritize the agreement between the creditor lending the money and the debtor borrowing it. Several points require attention in such contracts.
First, the creditor and debtor must mutually agree on interest terms. If no agreement on interest payment is reached, the principle is that no interest is charged. However, if an agreement on interest payment exists but the interest rate is not specified, the statutory interest rate of 5% per annum applies. Second, provisions regarding personal and real security required by the creditor must be specified in case the debtor cannot repay the money. The creditor may demand both personal and real security. Personal security refers to providing a guarantor who will repay the debt on the debtor’s behalf, while real security refers to providing property that can be disposed of in lieu of the debt. Real security must be disposable by the creditor; therefore, it must either be owned by the debtor or, if owned by another party, the creditor must obtain a promise from the owner regarding its disposal. Third, the date for repayment must be agreed upon. On the agreed repayment date, the debtor can deposit the money into the creditor’s bank account. However, if repayment is to be made in person, and the creditor intentionally fails to appear or refuses to accept the payment, preventing repayment, the deposit system can be utilized even without a prior agreement. Deposit refers to the debtor placing money or securities with the court’s deposit office. Making a deposit has the same effect as repaying the money that day, avoiding disputes over the repayment timing.
A loan agreement terminates when the debtor repays the borrowed money. If the debtor fails to repay, the creditor can enforce the debt through contract termination or compulsory execution. To assist debtors whose liabilities exceed their assets and who lack the means to repay, the court implements the Individual Rehabilitation System and the Individual Bankruptcy System under the Act on Rehabilitation and Bankruptcy of Debtors. Both systems require court confirmation of the debtor’s inability to repay. For the personal rehabilitation system, a debtor with a steady income can apply. If the debtor repays the amount determined by the court—calculated by subtracting the minimum living expenses from their income at the time of application—over five years, the remaining debt is discharged. However, if the debtor lacks a steady income, they can apply for the personal bankruptcy system. If the debtor files for bankruptcy with the court first, the court declares the debtor bankrupt. Once the debtor receives a discharge order, all debts are eliminated. While this system can alleviate the burden of excessive debt, the strain on the debtor and their family before the discharge is immense. Even after discharge, significant difficulties in normal economic life can arise, such as disadvantages in credit transactions with financial institutions.
Managing financial assets is crucial in relation to financial transactions. To maintain a healthy personal financial status, it is necessary to clearly understand the terms and procedures of financial transactions alongside managing financial assets. When dealing with financial institutions, interest rates and related matters must be scrutinized meticulously. In financial transactions between individuals, legal procedures must be strictly followed to clearly define each party’s rights and obligations. Furthermore, adapting flexibly to changing economic conditions is vital. This approach helps maintain personal financial stability and, ultimately, achieve economic freedom.
