【Holding】

Whether a prepayment fee constitutes deemed interest under the Interest Limitation Act such that the provisions on the maximum interest rate limit apply (negative)

【Summary of Decision】

[Majority Opinion] Article 4(1) of the Interest Limitation Act provides that "whatever received by a creditor in connection with a loan of money, regardless of whether it is called a deposit, discount, fee, deduction, advance payment, or any other name, shall be deemed interest." Since the purpose of this provision is to prevent evasive acts in which a creditor collects money from a debtor under another name as a means of circumventing the Act, anything that relates to a loan of money between a creditor and a debtor and can be regarded as consideration for the loan of money is deemed interest. However, a prepayment fee can hardly be regarded as consideration for a loan of money, and therefore does not constitute deemed interest under Article 4(1) of the Interest Limitation Act. The specific reasons are as follows.

① Article 153(2) of the Civil Act provides that "the benefit of time may be waived. However, this may not prejudice the interest of the other party," and Article 468 of the Civil Act provides that "unless the parties have made a special declaration of intention, the debtor may perform even before the due date. However, the debtor must compensate the other party for any loss." A prepayment fee is a fee borne by the debtor in a loan of money when the debtor repays all or part of the loan earlier than the due date, and is money paid as compensation for the loss caused by the debtor's performance before the due date. Whether the creditor has suffered a loss due to the debtor's prepayment must be determined individually, taking various circumstances into account. Where the creditor has suffered a loss, the amount of that loss cannot always be said to coincide with the "agreed interest from the time of prepayment until the due date," and it must be calculated in consideration of the cost of procuring the loan funds, the circumstances under which the agreed interest rate and the due date were set, the possibility of reinvesting the prepaid amount and the profit therefrom, and so forth. A prepayment fee agreement is a liquidated damages clause that predetermines the amount of damages to be paid upon prepayment in order to avoid the difficulty of proving such loss and its amount, and a prepayment fee can hardly be regarded as consideration for a loan of money in the original sense. In determining whether a prepayment fee constitutes deemed interest, such legal nature and economic substance of a prepayment fee must be taken into account.

② If a prepayment fee constitutes deemed interest under Article 4(1) of the Interest Limitation Act, the maximum interest rate prescribed in Article 2(1) of the Interest Limitation Act applies to it. Yet Article 8(1) of the Interest Limitation Act provides that "a person who receives interest in excess of the maximum interest rate prescribed in Article 2(1) shall be punished by imprisonment for not more than one year or by a fine not exceeding ten million won." Thus, whether a prepayment fee constitutes deemed interest under the Interest Limitation Act is a question that may lead directly to criminal punishment. Accordingly, whether a prepayment fee, which as described above has the nature of compensation for loss caused by performance before the due date, constitutes deemed interest, which has the nature of consideration for a loan of money, must be interpreted strictly.

③ Article 6 of the Interest Limitation Act provides that "where the court finds that the amount of damages predetermined by the parties for the non-performance of an obligation whose object is money is unreasonable, it may reduce it to a reasonable amount," thereby permitting the ex officio reduction of an unreasonably excessive prepayment fee. In addition, where a prepayment fee agreement was concluded in the form of standardized terms and its content is unfair, all or part of the agreement may be void under Article 6 or Article 8 of the Act on the Regulation of Terms and Conditions. Where the Act on Registration of Credit Business, etc. and Protection of Finance Users (hereinafter the "Credit Business Act") applies, prepayment fees may also be regulated as prescribed by that Act. Since such methods are available, even if prepayment fees are not included in deemed interest in the interpretation of Article 4(1) of the Interest Limitation Act, debtors can be sufficiently protected from unreasonably excessive prepayment fees.

④ In a case to which the Credit Business Act applied, the Supreme Court held that a prepayment fee constitutes deemed interest under Article 8(2) of the Credit Business Act. However, the Credit Business Act is distinguished from the Interest Limitation Act in many respects, including its legislative purpose and scope of application, whether it contains a provision on liquidated damages, the manner and frequency of use of prepayment fees, the need to regulate prepayment fees, the range of the statutory maximum interest rate, and the range of statutory penalties for violations. Since the above precedent reflects the special characteristics of the Credit Business Act that distinguish it from the Interest Limitation Act, it cannot be invoked as a matter of course in cases to which the Interest Limitation Act applies.

[Dissenting Opinion by Justice Lee Heung-gu, Justice Oh Kyung-mi, and Justice Park Young-jae] A prepayment fee, being liquidated damages for performance before the due date in a loan of money for consumption, constitutes deemed interest under Article 4(1) of the Interest Limitation Act. Supreme Court Decision 63Da1212, June 9, 1964, which held to the contrary that liquidated damages in a loan of money for consumption do not constitute deemed interest under the Interest Limitation Act and therefore the provisions on the maximum interest rate limit do not apply, should be overruled.

① A prepayment fee is something received by the creditor in connection with a loan of money and can be regarded as consideration for the loan of money, and therefore constitutes deemed interest under the Interest Limitation Act.

In light of the text of Article 4(1) of the Interest Limitation Act, which provides that "whatever received by a creditor in connection with a loan of money, regardless of whether it is called a deposit, discount, fee, deduction, advance payment, or any other name" is deemed interest, and the legal nature of a prepayment fee, a prepayment fee is something received "in connection with a loan of money." In an interest-bearing loan of money for consumption in which both the creditor and the debtor have the benefit of time, where the debtor waives the benefit of time under the agreed due date and performs before the due date, the debtor must compensate the creditor for losses such as the agreed interest up to the due date. A prepayment fee agreement is precisely a liquidated damages clause for compensating such loss. In other words, since a prepayment fee arises on the premise of a loan of money, it falls within the text of Article 4(1) of the Interest Limitation Act, namely "whatever received by a creditor in connection with a loan of money," and since the loss that a prepayment fee is intended to compensate is based on the loss of the "agreed interest up to the due date" that was originally contemplated as consideration for the loan of money, it is natural to regard it as consideration for the loan of money.

② If a prepayment fee were not regarded as deemed interest under the Interest Limitation Act, evasive acts circumventing the maximum interest rate provisions could not be prevented, which would be contrary to the purpose of the deemed interest provision. There are not a few situations in which the debtor in a loan of money for consumption can hardly exercise a choice vis-à-vis the lender regarding the interest rate or the period of use of the principal, and in such situations the lender, holding a superior position, may actively structure not only the interest rate but also the terms concerning the due date and prepayment fees in a manner favorable to itself, thereby potentially evading the maximum interest rate provisions.

③ In Supreme Court Decision 2010Do11258, the Supreme Court, even after taking into account the special nature of prepayment fees, held that they constitute deemed interest under the Credit Business Act, thereby reinforcing the legislative purpose of preventing evasive acts circumventing the maximum interest rate provisions, protecting finance users, and promoting the stability of the economic life of the people. Since it is desirable to interpret the deemed interest provisions of the Credit Business Act and the Interest Limitation Act uniformly so as to promote harmony and stability across the entire related legal system, it is reasonable to regard prepayment fees as constituting deemed interest under the Interest Limitation Act as well.

④ Supreme Court Decision 63Da1212, which held that the provisions on the maximum interest rate limit under the Interest Limitation Act do not apply to liquidated damages, is unsound and, being inconsistent with and contrary to Supreme Court Decision 2018Da22350, June 28, 2018, should be overruled; therefore, it cannot serve as a legal basis for holding that a prepayment fee does not constitute deemed interest under the Interest Limitation Act.

⑤ From a policy perspective as well, it is desirable to regard a prepayment fee as constituting deemed interest under the Interest Limitation Act.

【Referenced Statutes】

Article 1, Article 2(1), Article 4(1), Article 6, and Article 8(1) of the Interest Limitation Act; Article 153(2), Article 398(2), and Article 468 of the Civil Act; Article 6 and Article 8 of the Act on the Regulation of Terms and Conditions; Article 1 and Article 8(2) of the Act on Registration of Credit Business, etc. and Protection of Finance Users

【Referenced Precedents】

Supreme Court Decision 63Da1212, June 9, 1964
Supreme Court Decision 80Da2649, September 8, 1981 (Gong1993Sang, 1448)
Supreme Court Decision 97Da24023, September 30, 1997 (Gong1997Ha, 3277)
Supreme Court Decision 2010Do11258, March 15, 2012 (Gong2012Sang, 610)
Supreme Court Decision 2014Da24785, 24792, 24808, November 13, 2014 (Gong2014Ha, 2343)
Supreme Court Decision 2018Da22350, June 28, 2018
Supreme Court Decision 2021Da305338, April 13, 2023 (Gong2023Sang, 825)