[In-Depth Look] Changing the Legal Maximum Interest Rate of 10% and the 기준 for High-Interest Loans

Goridae란 refers to the practice of lending money at exorbitant interest rates. In medieval Europe, simply lending money and charging interest was enough to earn the lender the condemnation of being a usurer. Jews primarily made money through such activities, and in Shakespeare's play "The Merchant of Venice," the Jewish character Shylock is portrayed as a cruel usurer. During the Goryeo and Joseon dynasties, social turmoil often led to the prevalence of usury, resulting in the exploitation of common people, and policies to forgive debts were sometimes implemented to address this issue.

Currently, most countries around the world have enacted usury laws that limit contracts charging interest rates exceeding a certain threshold. The reason for limiting interest rates is to maintain a fair market order, as the party lending money unilaterally has the power to set the interest rate. The maximum interest rates in various European countries and U.S. states generally range from 10% to 20% per annum. In South Korea, interest rates are regulated separately under the Interest Limitation Act and the Loan Business Act. When the Loan Business Act was first enacted, the maximum interest rate was 66% per annum. Although that seems outrageous now, it has since been significantly reduced, and both laws currently set the maximum interest rate at 24% per annum. South Korea punishes only those who collect interest exceeding the maximum rate, but some countries like Japan impose criminal penalties merely for entering into loan contracts that exceed the maximum interest rate, thus regulating more strictly.

Recently, Kim Nam-guk, a member of the Democratic Party of Korea, proposed amendments to the Interest Limitation Act and the Loan Business Act to cap the maximum interest rate at 10% per annum, similar to certain U.S. states. Lee Jae-myung, governor of Gyeonggi Province and also a member of the same party, strongly advocates for such legal reforms. I also support these amendments.

Some argue that if the maximum interest rate is set too low, many loan businesses will close, and financial institutions like banks will narrow their lending scope, making it harder for people to borrow money. They question where people in urgent need of funds would turn.

In conclusion, there is no need to worry about the disappearance of lending sources. Even now, advertisements offering loans are everywhere around us. While small loan businesses may close due to reduced profitability, the overall size of the loan market is unlikely to shrink significantly. In this era of ultra-low interest rates, with the Bank of Korea's base rate at only 0.5% per annum, a 10% interest rate is by no means low. Globally, the loan business has a long history, and many people in South Korea are eager to engage in lending. A few years ago, the Korea Consumer Agency released a study on interest rate reductions and changes in the loan market, showing that the market size was maintained or even expanded as it adapted to lower rates, without contraction. Although loan businesses initially complain, they find ways to create new markets within the restricted interest rates. New types of financial companies and techniques also emerge. The fact that P2P finance and savings banks compete around the mid-interest rate level of about 10% per annum illustrates this.

On the other hand, if the maximum interest rate is lowered, loan companies are expected to develop more diverse credit assessment methods to proactively find new customers. Financial companies are already exploring indicators beyond basic credit metrics such as assets, income, occupation, and age, including payment rates for electricity and telecommunications bills, to broaden their lending base. Financial institutions, including banks and loan businesses, have incentives to scientifically assess borrowers' repayment ability, reduce default rates, determine appropriate interest rates, and secure more customers. Advanced countries are, at minimum, those without usury. Setting the maximum interest rate below 10% changes the standard for usury. It is not about making interest rates too low but establishing a more realistic standard in this era of ultra-low interest rates.

Baek Ju-seon, Attorney (Law Firm Yungpyeong)

This content was produced with the assistance of AI translation services.