Financial regulator to prohibit early redemption charges on loans

The financial regulator said Monday it plans to revise related regulations to prohibit early redemption charges amid its efforts to curb growing household debt.

Under the revised rules, lenders will be allowed to charge only the “actual” fees and costs of processing or closing loans, according to the Financial Supervisory Service (FSS).

Early redemption charges are already prohibited under the related laws but are allowed when the borrower repays in less than three years from taking out a loan, according to the financial regulator.

“Hence, the government seeks to allow lenders to charge borrowers the amount of their loss arising from a change in the management of their funds and the actual cost of administration related to the loan, such as marketing costs, and prohibit imposition of any other additional fees as an unfair business practice,” it said.

Once the revised rules are enforced, within six months following the mandatory 40 days of preannouncement of legislation until April 15, there may exist a difference between early redemption changes for in-person and online loans, possibly due to a gap in their associated marketing costs, according to the FSS.

Also, borrowers may be exempted from any additional charges when they switch to a different loan from the same lender.

“The government believes the proposed revision may reduce the burden of financial consumers from early redemption to reasonable levels,” it said.