The federal government is launching consultations to potentially lower the criminal rate of interest, specifically targeting instalment loans offered by Canadian lenders.
One of the smallest sections of last week’s budget could have a large impact on the finances of vulnerable consumers as a result. The announcement follows suggestions from two of the largest provinces that they would consider their own lower ceilings on interest rates as they implement new rules on instalment lenders.
The budget section “Taking Action to Address Predatory Lending” noted that many lower and modest-income Canadians rely on high-interest short-term loans to meet their living expenses and emergencies and “this leaves some Canadians living in a cycle of debt”.
The current limit is set by section 347 of the Criminal Code at an effective annual rate of 60%. This rate was set when the legislation was enacted in 1980, when interest rates were much higher than today. A number of measures have been introduced in the Senate to lower this limit, or express it as a rate relative to the bank rate instead of an absolute rate, but none has passed. Quebec’s limits have been set by court interpretations of its Consumer Protection Act at 35%.
The 60% effective annual rate is equivalent to a daily compounded Annual Percentage Rate (APR) of about 46.9%. The 46.9% rate is almost universally used by Canada’s instalment lenders, as shown in the Consumers Council of Canada’s 2018 report Consumers’ Experience with Higher Cost Credit.
Payday loans have been exempt from the federal criminal lending laws, with responsibility shifted to provincial legislation. Many provinces have recently implemented additional requirements on lenders who offer high-cost loans, typically in the range of 25% to 46.9%. British Columbia has passed laws, but is awaiting regulations, that would allow it to set a lower ceiling on what is allowed on instalment loans. In a recent consultation paper, Ontario suggested it was considering the same.