Supreme Court: Prepayment Fees on Loans Not Subject to Maximum Interest Rate Limit

"Prepayment Fees Are Not Deemed Interest Under the Interest Limitation Act"
...Supreme Court En Banc Issues First Ruling

The Supreme Court has ruled that prepayment fees do not constitute "deemed interest" under the Interest Rate Limitation Act, and therefore the maximum interest rate limit stipulated by the Act does not apply to them.

The Supreme Court en banc (Chief Justice Cho Hee-dae presiding) on September 18 returned a case for reconsideration, stating that the previous ruling was incorrect. The plaintiff had filed a lawsuit demanding the return of money received by the defendant in excess of the maximum interest rate set by the Interest Rate Limitation Act.

The central issue was whether prepayment fees should be regarded as deemed interest and thus be subject to the maximum interest rate under the Interest Rate Limitation Act. If contractual interest exceeds the maximum rate, the excess portion is rendered invalid.

The Supreme Court stated, "Prepayment fees are difficult to regard as consideration for a monetary loan, and therefore do not constitute deemed interest." The Court further explained, "These fees are considered as predetermined damages for losses incurred due to early repayment by the debtor, and are not compensation for the monetary loan in the original sense."

The Court held that an agreement on prepayment fees is a predetermined amount to compensate for potential losses and the difficulty of proving such losses in the event of early repayment, and thus cannot be seen as consideration for a monetary loan.

The Supreme Court added, "If prepayment fees were considered deemed interest under the Interest Rate Limitation Act, the maximum interest rate would apply and criminal penalties could be imposed, so a strict interpretation is required." The Court also clarified, "Previous Supreme Court rulings that treated prepayment fees as deemed interest under the Act on Registration of Credit Business reflect the unique nature of that law, and are different from this case, which concerns the Interest Rate Limitation Act."

Under the Interest Rate Limitation Act, which applies to loans between individuals, the maximum contractual interest rate for monetary loans is set by Presidential Decree and must not exceed 25% per annum. As of July 22, 2025, the current maximum rate is 20% per annum.