From the 7th of Next Month, Maximum Interest Rate Set at 20% per Annum... Excluding Retroactive Application for Loan Businesses

Savings banks, card and capital companies
retroactively apply to existing loan customers

[Asia Economy Reporter Ki Ha-young] Starting from the 7th of next month, the statutory maximum interest rate will be lowered from 24% per annum to 20%, but there is a divergence in whether this will be applied retroactively across different industries. In savings banks and card/capital companies, the interest rate reduction will apply to customers who have already taken out loans, but loan sharking businesses are excluded.

According to financial authorities and the industry on the 27th, the Savings Banks Association and the Credit Finance Association will apply the reduced statutory maximum interest rate to all borrowers starting July 7.

Following the revision of the Enforcement Decree of the Loan Business Act and the Interest Rate Restriction Act, from July 7, the maximum interest rate applied to financial company loans and private transactions over 100,000 KRW will be lowered by 4 percentage points from 24% to 20% per annum. This applies to newly signed, renewed, or extended loan contracts.

Legally, this does not apply to contracts concluded before the enforcement date. However, savings banks were originally supposed to apply the reduced maximum interest rate of 20% to existing contracts (contracts signed, renewed, or extended after November 1, 2018) according to the standard terms and conditions.

The industry has gone a step further and decided on a retroactive application policy. Savings banks have agreed to reduce the interest rates to 20% or less even for loans executed before November 2018, and card companies and capital companies have also decided to apply the lowered rates to existing loan customers.

However, in the loan sharking sector, which is considered the last bastion of regulated finance, retroactive application is deemed difficult. Due to discussions about the survival of companies following the maximum interest rate reduction, retroactive application is hard to consider. The loan sharking industry is concerned that with procurement interest rates reaching 5-6%, along with bad debt ratios, brokerage fees, and operating costs, negative margins could occur.

Nonetheless, some large companies are expected to review plans to provide benefits to existing loan users.