Principal and Interest on Loan Contracts With Annual Rates Over 60% Invalid... Government Launches 'War on Illegal Private Lending' [Financial Microscope]

Blocking Phone, KakaoTalk, and LINE Accounts of Illegal Private Lenders
Stronger Penalties: Up to 10 Years in Prison for Unregistered Lenders
Doubling of Reporting Rewards Policy Expected to Be Implemented

A new law has come into effect that allows consumers suffering from anti-social and illegal loan contracts?formed through violence, threats, or sexual exploitation?not to repay either principal or interest. In principle, loan contracts with an annual interest rate exceeding 60% are now considered invalid. Phone numbers and social networking service (SNS) accounts, such as KakaoTalk and LINE, used for illegal debt collection activities by illegal private lenders who repeatedly contact borrowers at night, can now also be blocked through official reports.

"Loan contracts with annual rates over 60% are illegal"

A flyer related to private loan financing is placed at a closed store in Myeongdong, Seoul. Photo by Jinhyung Kang aymsdream@

According to the financial sector on July 23, the government began implementing amendments to the Enforcement Decree and Supervisory Regulations of the Loan Business Act, which include these provisions, starting the previous day.

The core of the amendment is that borrowers are not required to repay either principal or interest on anti-social and illegal loan contracts with interest rates exceeding 60%. Previously, for loan contracts that exceeded the statutory maximum interest rate of 20%, only the portion of interest above the legal limit could be invalidated. Now, for anti-social loan contracts, borrowers are exempt from repaying both principal and interest.

Even if a contract with an unregistered illegal private lender does not qualify as an anti-social loan contract, the borrower is not required to repay interest. Unregistered illegal private lenders who attempt to collect interest in violation of this rule face penalties of up to five years in prison or fines of up to 200 million won. Even registered lenders may have their contracts canceled at any time if they fail to provide a loan contract or provide false information. The same applies if a contract is made by impersonating a credit finance institution.

Previously, the Financial Services Commission had set the threshold for what constitutes an anti-social and illegal loan contract at 100% annual interest in its legislative notice in April, but later strengthened it to 60%. Some have questioned the basis for tightening the standard, and others have raised concerns that the government’s move to invalidate private contracts by setting specific criteria for anti-social agreements constitutes excessive infringement of property rights.

The government explained that there is sufficient legal basis for setting the threshold at 60%, as the Civil Act stipulates that anti-social loan contracts are invalid. The government also referred to a May 29 ruling by the Gwangju District Court, which, for the first time, ordered a lender to return both principal and interest to victims in cases involving illegal loan contracts with annual rates ranging from 1,738% to 4,171%. An official from the Financial Services Commission stated, "We believe that, in accordance with Article 103 or 104 of the Civil Act, lawsuits to invalidate anti-social loan contracts can be filed, and victims can claim the return of principal and interest from illegal private lenders."

Blocking KakaoTalk and LINE accounts also possible

The financial supervisory authorities have introduced measures to block not only phone numbers used in illegal loan advertisements, but also those used in debt collection and all other loan-related activities. The aim is to significantly reduce the physical and psychological harm suffered by debtors due to illegal collection activities, such as threats to repay money day and night, thereby increasing the effectiveness of the policy.

On July 20, the Financial Supervisory Service announced that it would include all illegal lending activities?such as making abusive or threatening calls to debtors or repeatedly contacting them at night?among the cases eligible for phone number suspension. Previously, only illegal loan advertisements by unregistered lenders were subject to regulation. Now, even registered lenders can have their numbers suspended if they engage in illegal debt collection, such as abusive language, threats, or nighttime contact.

Regulation of SNS platforms such as KakaoTalk and LINE has also been strengthened. If consumers are subjected to illegal debt collection, they can report the lender’s phone number or KakaoTalk/LINE account via the Financial Supervisory Service website or the relevant application. After a review, the Ministry of Science and ICT and telecommunications companies will take action to disconnect the lender’s phone number or SNS account.

An official from the Financial Supervisory Service stated, "Expanding phone number suspensions and restricting KakaoTalk/LINE accounts will fundamentally block financial crimes that harm people’s livelihoods and greatly contribute to protecting vulnerable groups from illegal private lenders."

In addition, penalties for illegal private lenders have been strengthened. The punishment for illegal lending activities by unregistered lenders has been raised to up to 10 years in prison, equivalent to the penalty for fraud under the Criminal Act. Previously, the maximum was five years. Fines have also been increased tenfold, from 50 million won to 500 million won. Penalties for violating the maximum interest rate have been raised from up to three years in prison and a 30 million won fine to up to five years in prison and a 200 million won fine.

Doubling the reporting reward will create synergy

On May 28, 2025, at a rally held at Wangsimni Station Plaza in Seongdong-gu, Seoul, Lee Jae Myung, then the presidential candidate, greeted citizens as the Democratic Party of Korea announced a policy pledge to double the reward for reporting unregistered loan sharks. Photo by Kim Hyunmin

The loan industry interprets the legal definition of anti-social contracts, the increase in penalties for lenders, and the introduction of communication blocking measures for collection activities as the government’s official declaration of a "war on illegal private lending."

There is an expectation that public trust in the loan industry will rise further if President Lee Jae Myung’s pledge to double the reporting reward is implemented.

On May 28, the Democratic Party of Korea specified in its policy pledge book that it would "double the reward for reporting unregistered loan sharks." This means the current reward of 20 million won would be raised to at least about 40 million won.

An industry representative welcomed the move, saying, "Since the policy goal is to create an environment where legally registered lenders can operate properly, we hope that detailed regulations will be established in the future," and added, "It will help alleviate the anxiety that financially vulnerable groups feel toward registered lenders."