Regulators tighten auto-backed loans, closing last easy-credit loophole

Auto-backed loans, which had emerged as a quick-cash lifeline as successive government household lending curbs raised borrowing barriers, now face tighter restrictions. Such loans will in principle be capped at a loan-to-value ratio of 100%, with any amount exceeding that threshold subject to unsecured loan regulations. In addition, such loans will be excluded from mid-rate lending performance tallies, closing a regulatory arbitrage loophole.

The Financial Supervisory Service's credit finance supervision bureau sent a business cooperation letter to specialized credit finance companies on Wednesday outlining "precautions related to auto-backed household loans," financial industry sources confirmed. The letter made clear that auto-backed loans are products to be extended only within the range of a vehicle's collateral value.

Some financial firms had until now extended loans to creditworthy borrowers beyond a vehicle's collateral value. While the loan-to-value ratio on auto-backed loans typically hovers around 80%, lenders had been able to exceed 100% by factoring in a borrower's credit rating, annual income and repayment capacity.

Under the new rules, any loan amount exceeding a 100% loan-to-value ratio will be treated as an unsecured loan and subject to a cap tied to the borrower's annual income. Lenders will also be required to assess a borrower's creditworthiness and repayment capacity using the same standards applied to ordinary unsecured loans when calculating credit limits. However, auto-backed loans for commercial vehicles will be exempt from the annual income cap requirement.

Authorities are also moving to block the practice of using auto-backed loans to inflate mid-rate lending performance figures. Financial firms had each classified auto-backed loans under different categories — unsecured loans, other loans and so on — but going forward all such loans will be uniformly managed under the "other household loans" category.

The decision to standardize classification criteria also reflects the fact that some financial firms had been counting auto-backed loans toward their mid-rate lending performance figures. Doing so allowed them to receive more favorable regulatory treatment than ordinary loans during household lending volume management.

Authorities have decided that new auto-backed loans originated from this month — including increases and contract renewals — will be classified as "other household loans." Where auto-backed loans are already included in mid-rate lending balances, they will be excluded starting from the mid-rate lending balance figures recorded as of the end of 2025.

An industry official said of the new policy: "It appears intended to reestablish auto-backed loans in line with their original nature as collateral-based products extended within the range of a vehicle's value, and to block the effect of using auto-backed loans to boost mid-rate lending supply figures or reduce regulatory burdens."

The measures are widely seen as an effort to curb the balloon effect that has driven demand toward auto-backed loans as successive government household lending curbs prompted financial institutions to raise their lending thresholds. After the government's June 27 package last year capped unsecured loan limits at borrowers' annual income, auto-backed loans — which carry relatively high approval rates — became a workaround channel.

Loan demand typically shifts from mortgage loans to unsecured loans once mortgage borrowing limits are exhausted. Auto-backed loans in particular are considered the last resort for quick cash among those in financial difficulty, as they carry less stringent income requirements and remain relatively accessible even for borrowers with low credit scores.

As demand for such loans has grown, illegal high-interest auto-backed lending has also been on the rise. Operators have been demanding fees — labeled as travel expenses or parking charges — that exceed the legal interest ceiling on loans secured by vehicles, or causing harm by driving the collateral vehicles without authorization.

According to the Financial Supervisory Service, the loans in reported cases ranged from 2.5 million to 30 million won ($20,300), with interest rates reaching between 27 and 229 percent per year. Cases were also confirmed in which lenders threatened to notify vehicle installment finance companies or leasing firms of overdue payments during collection — effectively threatening borrowers with criminal complaints.

The FSS said that parking fees, travel expenses and commissions demanded by lenders beyond the agreed interest are all counted as interest, and that if the annual interest rate exceeds 60 percent, both the principal and interest agreements may be rendered void. It also urged borrowers to exercise particular caution, noting that offering a leased or installment-financed vehicle as collateral could expose them to criminal liability.