Reasons for Proposal
According to Article 2(1) of the current Act, the maximum interest rate under a loan contract is set at 25 percent per annum.
However, while the loan interest rate has been on a continuous decline due to the recent recession, the maximum interest rate of the current Act has remained high and thus been a heavy burden for small owner-operators and the public.
The loan interest rate has continuously declined during the recent economic recession, and many other countries such as Japan (15%~20% per annum), the U.S. (average of all states is 20%), Germany (about 20%), etc. have set the maximum interest rate at 20%.
In accordance with the original intent, the private loan market legalization has been prominent, but the high interest rate and illegal debt collection practice have caused serious social issues such as an increase in personal bankruptcy and suicide. Also, although many credit service providers are taking illegal profit by exceeding the interest limit, only the interest that exceeds the maximum interest rate is nullified under the current law and punishment is not heavy enough eradicate such practice. Thus, people with low credit ratings who have no choice but to use the private loan market struggle greatly with the high interest rate to the extent that they cannot become financially independent, consequenlty infringing on the people’s economic freedom.
Therefore, by lowering the maximum interest rate this proposal aims to reduce the economic burden on small business owners and low-income households, thereby stabilizing the people’s economic life (Articles 2, 7 and 8).
Major Provisions
The maximum interest rate shall be set at 20% per annum. If the contract’s interest exceeds the maximum interest rate prescribed in paragraph 1, then the whole contract related to such interest shall be nullified. And if the contract’s interest is more than double the maximum interest rate, then the whole loan contract including the contract of such interest shall be nullified (Article 2).
The provision that this Act shall not apply to any financial business and credit business that fulfills the authorization, permission, and registration in accordance with other Acts and unregistered credit service providers under Article 9-4 of the “Act on Registration of Credit Business, etc. and Protection of Finance Users” shall be deleted, and this Act shall apply to all loan contracts with interest (Article 7).
