Interest Limitation Act

The Interest Limitation Act (Act No. 8322, 이자제한법/利子制限法) was re-enacted in 2007 to protect the economically fragile debtors by setting the ceiling of interest rate.

On January 13, 1998 right after the so-called "IMF Crisis", the Act had been abolished for the purpose of "facilitating efficient distribution of resources through a free determination of interest rate by fund supply and demand," as advised by the IMF.

But now any person who has received the interest exeeding the ceiling of interest rate set forth by the Interest Limitation Act shall be punished in accordance with the newly inserted penal provision of the Act as from October 26, 2011.

Key words
interest rate, interest limitation, usury

Legislative background
After the financial crisis was settled and Korean financial market has been stabilized, the ceiling of interest rate on private loans has been subject to the private negotiation based upon the prevailing credit market conditions. As a result, sub-prime borrowers have only to accept relatively high interest rate demanded by usury lenders.

However, due to the lack of effective management and supervision, the Act on Registration of Credit Business and Protection of Finance Users currently in force fails to regulate the illegal operations of credit businesses, consequently guaranteeing a high interest rate of 66 percent p.a. even to private money lenders.

Such failure in achieving the legislative purpose of fostering private loans and restricting interest has driven this legislation to create a social safety net that would protect the national economy.

Main points of the Act
In order to protect the public from the evil practices of high interest usuries, the Act shall be implemented as follows:
 * The purpose of the Act shall be to "promote a stable economic environment for the public and to realize economic justice by setting appropriate limits to interest rate." Article 1
 * Although there must be a limit in the maximum interest rate concerning cash loan contracts, the maximum interest rate shall be prescribed by Presidential Decree within the extent that does not exceed 40 percent per annum considering the economic circumstances. Article 2 (1). The ceiling of the maximum interest rate was lowered from 40 percent p.a. to 30 percent p.a. by the Act No.10925 effective October 26, 2011.
 * Excess interest in a contract that surpasses the maximum interest rate shall become nullified; regulatory provisions will clearly appropriate such excess interest that has already been paid as stated in the original copy. Article 2 (3) and (4)
 * Any person who has received excess interest in violation of the newly set maximum interest rate of 30 percent p.a. shall be punished by imprisonment for not more than one year or a fine not exceeding 10 million won. However, such imprisonment and fine may be jointly levied. Article 8 (Penal provision) of the Act effective from October 26, 2011.
 * Through regulations on deemed interest, circumvention of law in which creditors seek to evade the limits imposed by the Interest Limitation Act by collecting cash from debtors under the pretext of discounts or other measures shall be prevented. Article 4
 * Though applied to not only trade among general private persons but also to unregistered credit businesses, established institutions as well as registered credit businesses shall be excluded from application in order to prevent unexpected confusion in the credit market. Article 7

Law enforcement
In spite of the statutory maximum interest rate, private lenders would not observe the Act making finacial and social troubles mainly to low income people. On April 17, the government declared an all-out war on illegal private lending practices, with some 11,500 people from more than eight government agencies assigned to investigating and cracking down on the rising problem of unfair or coercive lending practices.

According to the crack-down plan spearheaded by the Prime Minister’s Office, multiple investigative teams will be set up at prosecutors’ offices nationwide, while some 1,600 police officers will form teams in 16 regional police agencies to carry out busts. Call centers for reporting illegal lending will be set up at the Financial Supervisory Service (FSS) and the National Police Agency by May, with the FSS carrying out inspections of dubious private lenders while the National Tax Agency will track private lenders for signs of tax evasion. All profits above the current legal cap on private lenders’ lending rates - 39 percent for registered and 30 percent for unregistered lenders - will be used to support victims of illegal practices, while lenders engaging in illegal debt collection activities will be subject to on-site reviews and barred from commissioning debt collection to other agencies for three years.