Reasons for Increasing Calls to Ease the Maximum Interest Rate Regulation

[Asia Economy Reporter Eunju Lee] Amid rising interest rates, there are calls to ease the statutory maximum interest rate regulations. Last year, the statutory maximum interest rate was lowered, causing the credit loan market in the lending finance sector to shrink significantly, which greatly reduced loan accessibility for financially vulnerable groups. Here, we introduce the rationale behind the argument to lift the maximum interest rate regulation.

The lending finance market is the most marginal market within South Korea's loan market. It mainly involves financially vulnerable consumers with low credit. The problem is that the maximum interest rate regulation, which prohibits charging interest above 20%, is causing the opportunity for extremely low-credit borrowers to access loan services through the lending market to disappear. In other words, inappropriate regulations have caused a mismatch between loan demand and supply in the market.

At the 13th Consumer Finance Conference held by the Korea Lenders Association on the 15th, Professor Choi Cheol of Sookmyung Women's University presented research diagnosing a decrease in credit supply in the lending finance market. According to Professor Choi, the credit loan volume in the lending finance market, which was 7.367 trillion KRW at the end of 2020, decreased to 7.029 trillion KRW by the end of 2021. This indicates that extremely low-credit borrowers who must pay high-interest costs above 20% to use the lending market are being continuously excluded from the financial market.

The Korea Lenders Association also believes that 200,000 to 300,000 lending finance users lose loan opportunities annually due to the maximum interest rate regulation. Therefore, there are calls to lift the current 20% maximum interest rate regulation. First, Professor Choi diagnosed the appropriate maximum interest rate level for the lending market at 32.2%, and he suggested that the maximum interest rate should be at least 26.7% or higher.

What about other countries? How do they regulate excessive interest margins in lending finance? According to Professor Choi, there is currently no general maximum interest rate regulation at the federal law level in the United States. However, the Military Lending Act, revised in 2006, sets the maximum interest rate at 36% per annum. Additionally, the regulations vary greatly by state. Some states have no regulation at all, while others have maximum interest rate regulations ranging from 16% to as high as 600%, showing significant variation.

In the case of the EU, regulations also vary by member country. Although there is a rule at the EU level that a unified maximum interest rate regulation should exist, each country autonomously enforces its regulations. Among EU member countries, only five have adopted a fixed statutory maximum interest rate system like South Korea. The remaining 22 countries have adopted a variable maximum interest rate system that reflects market conditions. In other words, most EU member countries and some US states do not impose specific interest rate regulations through prior regulations like South Korea’s Lending Business Act. Instead, they regulate and verify excessive profits on a case-by-case basis through civil and criminal case law precedents after the fact.