Financial Services Commission to Promote Measures Reducing Burden of Early Repayment Fees
The five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) and the policy bank Industrial Bank of Korea have decided not to charge any prepayment penalties on all household loans throughout December. This measure aims to reduce the financial burden on consumers and encourage loan repayment to slow the increase in household debt.
Accordingly, for December only, household loan borrowers who repay their bank loans with their own funds or switch to another product within the same bank will be fully exempt from prepayment penalties.
The six banks will also extend the prepayment penalty exemption program for vulnerable borrowers, including low-credit borrowers (bottom 30% credit rating), which was introduced earlier this year for a one-year period. This program will be operated for an additional year until early 2025.
Meanwhile, the Financial Services Commission is promoting measures to reduce the burden of bank loan prepayment penalties, which amount to about 300 billion KRW annually. The core of the plan is to reflect only the essential costs incurred by banks at the time of lending in the prepayment penalty. If banks add other items to calculate the prepayment penalty, they will be fined.
The Financial Services Commission, after consultations with the banking sector, has prepared a plan to improve the prepayment penalty system and reduce consumer burden based on these principles. The amount collected from prepayment penalties by banks was 384.4 billion KRW in 2020, 317.4 billion KRW in 2021, and 279.4 billion KRW last year, consistently exceeding 300 billion KRW annually. The problem is that prepayment penalties are imposed uniformly across banks without clear standards.
The prepayment penalty rates for mortgage loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) are all the same: fixed rate at 1.4% and variable rate at 1.2%. For unsecured loans, the rates range from 0.6% to 0.8%. From the banks’ perspective, the risk of fixed interest rates is higher in terms of fund management risk, yet the fee difference between variable and fixed rate loans is minimal. Moreover, most banks charge the same fees for loans made via mobile channels as those made at branches.
Under the current Financial Consumer Protection Act, prepayment penalties are generally prohibited. However, an exception allows charging fees if the borrower repays within three years from the loan date. Banks argue that charging fees for early repayment is necessary to cover losses from fund management disruptions and administrative and recruitment costs related to loans.
Furthermore, this issue was raised during the Financial Services Commission’s National Assembly audit held on October 11. At that time, Assemblyman Cho Eung-cheon of the Democratic Party pointed out, "Banks pay very little interest when deposits are withdrawn early, but charge high fees when loans are prepaid," and emphasized the need for financial authorities to review whether prepayment penalties are reasonably calculated.
According to calculations by Assemblyman Cho’s office, if a borrower takes out a 100 million KRW unsecured loan and repays it in full after five months, applying a 0.6% prepayment penalty rate, the customer must pay 266,600 KRW in fees to the bank. In contrast, if the customer withdraws a 100 million KRW fixed deposit after five months, applying the base interest rate of 0.95% and differential rates, the customer receives only 82,470 KRW in interest from the bank. In response, Chairman Kim Ju-hyun stated, "We will review the prepayment penalty calculation system."
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