Before the Legal Maximum Interest Rate of 20% Applies... Ruling Party Proposes Bill to Lower It Further to 15%

Assemblyman Song Jae-ho Introduces Amendment to Loan Business Act
Includes Reduction of Maximum Loan Interest Rate to 15% and Eradication of Illegal Activities

[Asia Economy Reporter Park Sun-mi] A bill to amend the Loan Business Act, which lowers the maximum interest rate for loan businesses from the current 20% per annum to 15%, has been submitted to the National Assembly.

On the 24th, Song Jae-ho, a member of the National Assembly's Political Affairs Committee from the Democratic Party of Korea, announced that he had proposed a partial amendment to the "Act on Registration of Loan Business and Protection of Financial Consumers" (hereinafter referred to as the Loan Business Act) to the National Assembly. The amendment includes lowering the maximum annual interest rate to 15%, including for unregistered loan businesses, and imposing fines of up to 30 million KRW for contracts that violate the statutory maximum interest rate limit.

The amendment requires that loan contracts indicate whether the loan business is registered, so that borrowers can clearly recognize if the lender is a registered loan business. It also provides grounds for borrowers to report violations of the statutory maximum interest rate to the mayor or governor, who can then impose fines of up to 30 million KRW. This amendment was jointly proposed by Assembly members Kim Seung-nam, Kim Young-ho, Ryu Ho-jeong, Min Hong-chul, Seo Young-kyo, Oh Young-hwan, Lee Hyung-seok, Jo Oh-seop, Han Jun-ho, and Moon Jung-bok.

The current Loan Business Act limits the interest rate that loan businesses can charge to a maximum of 27.9% per annum, and the enforcement decree was revised in March through the State Council to lower this to 20%. For unregistered illegal loan businesses, the maximum interest rate is set at 25% per annum under the Interest Rate Restriction Act, with the enforcement decree applying a 24% rate.

However, since most customers borrowing from loan businesses are financially vulnerable with low credit ratings, there have been many concerns that the current 20% rate is still too high.

A survey conducted by the Korea Inclusive Finance Agency under the Financial Services Commission found that 44.9% of respondents borrow from loan businesses because they cannot borrow the necessary amount from other types of financial institutions. When even registered loan businesses are inaccessible, borrowers are driven to unregistered illegal loan businesses, where the pressure of high interest rates intensifies. According to the survey, 69.9% of those who borrowed from illegal private lenders after being rejected by loan businesses reported interest rates exceeding the statutory maximum. Alarmingly, 12.3% reported paying interest rates exceeding 240% per annum.

Assemblyman Song stated, “Financially vulnerable groups who cannot even use loan businesses with high interest rates are driven to illegal private lending, bearing excessive interest burdens, and legal protection is very weak. Since loan businesses are used by struggling citizens, we will lead more rational and thorough institutional improvements to contribute to building a warm foundation for inclusive finance.”