[Exclusive] Introduction of Used Car LTV Limiting Loan Amount... Preventing Hidden Contracts

Preventing Excessive Loans and Financial Fraud
YeoSin Association Announces Revision of Used Car Finance Practice Improvement Guidelines
Strengthening High-Risk Loan Screening

[Asia Economy Reporter Ki Ha-young] Jeong Mansu (alias), a self-employed person, filed a complaint with the Financial Supervisory Service, claiming that his son, who bought a used car, was subjected to a blind contract. After his son was discharged from the military, he took out a loan of 20 million won through a recruiter introduced by a car dealer, but when checking the price of the used car, it was only 10 million won. He took on unnecessary debt by borrowing twice the market price of the vehicle.

Specialized credit finance companies such as capital companies limit used car loan amounts to prevent excessive lending and financial fraud. Because it is difficult to know the exact market price, there have been continuous cases of inflating used car prices falsely to increase loan limits or financial fraud. Accordingly, in 2019, financial authorities limited loan amounts to not exceed 110% of the market price, and the industry has further specified this autonomously by setting loan limits according to credit ratings.

According to the financial sector on the 21st, the core of the 'Guidelines for Improving Used Car Finance Business Practices' announced for revision by the Credit Finance Association is the differentiation of loan limits and strengthening of screening for high-risk loans.

Not only passenger cars but also commercial vehicles used for business are included in the scope of used car loans, and financial companies must execute loans within the maximum loan-to-value (LTV) ratio for vehicles according to the customer's credit score. When applying the vehicle LTV standard, companies should not rely solely on external credit evaluation results but also establish and operate their own risk group setting criteria to prevent excessive loan limits due to overestimation of credit for thin-file or low-income customers. If there is objective evidence that the repayment ability (collateral, cash flow, etc.) of borrowers in the bottom 20% or lower is good, additional loan limits can be granted within up to 50% of the existing maximum loan limit according to the customer's credit score.

For used passenger car loans, minimum loan approval conditions are set for customers with credit scores in the bottom 10% or lower, and loans are generally prohibited for customers who do not meet these minimum conditions. However, an exception clause allows loans to customers in the bottom 10% or lower if they have been employed for more than six months and have objective evidence of good repayment ability.

Additionally, grounds for strengthening screening of multiple used car loan borrowers have been established. The main point is to apply enhanced loan screening standards, including thorough monitoring through the Fraud Detection System (FDS), for customers who have taken out used car loans within the last six months.

An industry official said, "To strengthen consumer protection, we have been promoting the revision of the guidelines for improving used car finance business practices since the third quarter of last year," and added, "The revised guidelines will be implemented from July and August for each clause."

Meanwhile, the used car finance market is rapidly growing. According to Statistics Korea, the used car market size in 2018 was 12.4217 trillion won, a 29.1% increase from the previous year. The industry forecasted that the market size would reach about 22 trillion won last year alone.

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