The Supreme Court en banc on the 18th ruled that a "prepayment fee," which a debtor must pay to a financial company to repay a loan before maturity, is not included in the calculation of the maximum rate under the Interest Limitation Act. With this, the legal community said that "debtors may be put at a disadvantage while financial companies may benefit."
The Supreme Court en banc ruling that day reflected the majority opinion of 10 of the 13 justices, including Chief Justice Cho Hee-dae. The key issue was whether the prepayment fee is deemed interest under the Interest Limitation Act and thus included in the calculation of the maximum rate. Article 4, Paragraph 1 of the Interest Limitation Act states that "regardless of the names deposits, discount fees, fees, deductions, subrogation payments, and others, what a creditor receives in connection with a monetary loan shall be regarded as interest." The purpose is to prevent financial companies from collecting excessively high interest by attaching various labels.
The case began when Company A borrowed 6.8 billion won from Company B in 2019. Company A later repaid the debt in full before the loan matured and also paid a prepayment fee of 288 million won.
Company A then filed suit, saying, "At first, Company B agreed to lend 6.8 billion won, but it first deducted various fees and prepaid interest and actually paid only 5.5 billion won, and during early repayment it also took a prepayment fee, pocketing interest that exceeded the maximum rate under the Interest Limitation Act."
The court of first instance found that the prepayment fee could be regarded as interest. It ordered B to return to A a little over 679 million won that it received in excess of the cap under the Interest Limitation Act.
The appellate court also recognized the prepayment fee as interest. The bench said, "A prepayment fee is consideration related to a monetary loan, so the statutory maximum interest rate limit under the Interest Limitation Act applies, and any excess constitutes unjust enrichment."
But the Supreme Court reached the opposite conclusion. The en banc panel said that day, "A prepayment fee is paid as damages to the creditor caused by the debtor's repayment before the due date, so it is difficult to view it as consideration for a monetary loan in the original sense."
It went on, "If a prepayment fee falls under deemed interest under the Interest Limitation Act, the maximum interest rate would apply and it could lead to criminal punishment, so a strict interpretation is necessary." It also said, "Even without including a prepayment fee in deemed interest, debtors can be protected through measures such as ex officio reduction of damages under Article 6 of the Interest Limitation Act."
Accordingly, the Supreme Court reversed the appellate ruling and remanded the case to the Seoul High Court.
However, Justices Lee Heung-gu, Oh Kyung-mi, and Park Young-jae dissented, saying, "A prepayment fee should be regarded as interest under the Interest Limitation Act." The three justices said, "A prepayment fee is something the creditor receives in connection with a monetary loan and can be viewed as consideration for the loan," adding, "If a prepayment fee is not regarded as deemed interest under the Interest Limitation Act, it would be impossible to prevent evasions of the maximum interest rate, which runs counter to the purpose of the deemed interest provision."