FSS issues consumer alert over variant vehicle-collateral loans

Annual interest rates as high as 229%; half of victims in their 30s

The Financial Supervisory Service has issued a consumer alert as a variant form of illegal private lending — using vehicles as collateral to extract charges exceeding the legal interest cap — continues to spread. [Created using Gemini]
The Financial Supervisory Service has issued a consumer alert as a variant form of illegal private lending — using vehicles as collateral to extract charges exceeding the legal interest cap — continues to spread. [Created using Gemini]

The Financial Supervisory Service issued a consumer alert Thursday over a growing form of illegal private lending in which lenders seize vehicles as collateral and extract money under various pretexts — including parking fees and travel expenses — in excess of the legal interest cap.

The FSS said 12 complaints have been filed this year involving illegal lenders who secure a borrower's vehicle as collateral and then collect interest above the statutory limit. Reports started with one case in January, none in February, two in March, and four each in May and June — a clear upward trend.

These operators demand excess interest under labels such as parking fees and travel costs, and have been found to use the collateral vehicles without authorization, causing additional losses to borrowers. In some cases, lenders threatened victims during debt collection by warning they would report the matter to the vehicle's installment-finance company or leasing firm, exposing the borrower to criminal charges.

A ruling by a Daegu court illustrates the scheme: a lender extended a 2.5 million won ($1,628) loan secured by a passenger car and, on top of a monthly prepaid interest charge of 40,000 won, separately collected 350,000 won per month in parking fees for the collateral vehicle and 80,000 won in travel and transportation costs. Converting all extracted amounts into interest, the effective monthly rate reached 18.8%, equivalent to an annualized rate of 225.6%.

The FSS said that regardless of what such charges are called, any fee a lender bills in connection with a loan constitutes interest. Even registered lenders cannot charge an annual interest rate above 20%, and any rate exceeding 60% per year renders both the principal and interest void.

Leased and installment-financed vehicles require particular caution, as they may not be eligible for use as collateral. A leased vehicle is owned by the leasing company and cannot legally be pledged as collateral at all. An installment-financed vehicle pledged without the consent of the financing company — which holds the mortgage — may constitute concealment of mortgaged property. The Seoul Eastern District Court found a borrower guilty of embezzlement for pledging a leased vehicle as collateral, while the Seoul Central District Court convicted a borrower of obstruction of rights for doing the same with an installment-financed vehicle.

An analysis of victims showed loan amounts ranging from 2.5 million won to 30 million won, with interest rates between 27% and 229%. By age group, those in their 30s were the most common victims at six, followed by two in their 60s and one each in their 20s, 40s and 50s. Most victims lived in the Greater Seoul area — five in Gyeonggi Province, three in Seoul and one in Incheon — though cases were also reported in Daegu, South Gyeongsang Province and Gwangju.

The FSS urged anyone who suspects illegal private lending to report it promptly to the FSS or law enforcement. Those who have difficulty filing a report can receive assistance through a one-stop integrated support system staffed by dedicated case workers. Victims of illegal lending should contact the FSS, while those struggling with excessive debt can reach out to the Korea Inclusive Finance Agency or the Credit Counseling and Recovery Service.

Meanwhile, complaints about illegal private lending reached 17,538 last year — the highest since the reporting center was established in 2012. The number of complaints has risen for six consecutive years since 2019.


psj@heraldcorp.com