Praise for limits

Ottawa slashes maximum rate allowed by lenders to 35%

In a move hailed as a victory by opponents of so-called predatory lending, Ottawa has pledged to cut the legally permitted cap on interest rates for loans.

The federal government said in Tuesday’s budget that it intends to cut the maximum allowable annual percentage rate (APR) on loans to 35 per cent, down from the current 47 per cent. It also plans to launch consultations on whether the rate, which is in the Criminal Code, should be lowered even further.

The maximum interest rate is often charged on instalment loans of $1,500 or more offered by “alternative lenders,” such as Easyfinancial, to borrowers with poor credit who don’t qualify for loans at lower rates from Canada’s big banks. (It does not apply to payday loans, which are short-term, ultra-high-interest loans for smaller amounts that are exempt from the criminal rate and fall under provincial rules.)

“I was like, ‘Finally, they’re listening to us,’ ” said Donna Borden, a Toronto-based leader with the anti-poverty group ACORN, who has been calling for the government to change the law for about 15 years after her own experience with a high-interest loan.

“We were pushing for 30 per cent and they did 35 per cent,” she said, adding, “(But) it will save a lot of low- and moderate-income people

a lot of money.”

The federal budget gave the example of someone borrowing $5,000 amortized over two years and said that under the new rate, the borrower would save $775 over the life of that loan.

The Liberals promised to lower the criminal rate of interest during the 2021 election campaign and launched a consultation last summer that ACORN said was long overdue.

The alternative lending industry lobbied against the changes, warning that lowering the rate could lead to some vulnerable borrowers being cut off from any access to credit and then turning to even higher-interest payday loans.

The Canadian Lenders Association, which represents alternative lenders but not the payday loan industry, said in a statement that it is disappointed by the budget announcement, which it claims could cut 4.8 million Canadians off from access to credit.

That number is based on an analysis it previously conducted that reviewed the “pricing practices of its members.” The CLA says that lenders would reject higher-risk borrowers if they can’t charge enough interest to cover the credit losses expected on loans that are not repaid.

“The CLA put considerable effort into informing the federal government of these unintended consequences and is disappointed this reality is not acknowledged by today’s announcement,” it said in the statement.

The government also promised a separate consultation on the payday loan exemption from the federal interest rate cap. In the meantime, it said it plans to put a cap on payday loan charges, limiting the amount of interest to no more than $14 per $100 borrowed.

The payday loan cap under Ontario’s provincial rules is currently $15, which works out to an APR of more than 390 per cent. The charges are even higher in some other provinces.

The interest-rate ceiling in the Criminal Code is technically an “effective annual rate” of 60 per cent, which is based on a complicated formula tied to actuarial principles. When expressed in the more familiar APR terms — that’s the cost you pay to borrow money for a year including all fees and interest — the maximum amount lenders can charge is 47 per cent.

The government said the new rate will be 35 per cent in those APR terms. It said this is equivalent to the maximum interest rate allowable in Quebec, which has imposed its own cap.

It is not clear if the 35 per cent cap includes all fees and extra costs, such as insurance, an issue ACORN wants clarity on. A spokesperson for Finance Minister Chrystia Freeland was not able to answer this question on Wednesday before the deadline for this story. It is also not clear exactly when the legislative changes to the Criminal Code will be made.

The maximum rate has long been far higher than what banks charge on regular loans and mortgages and even well above credit cards, a relatively high-interest form of borrowing at around 19 or 20 per cent.

The cap was set in 1980, when the Bank of Canada’s overnight interest rate was 21 per cent (it had hiked rates dramatically at the time to fight inflation) compared to the current rate of 4.5 per cent.

It is not clear if the new 35 per cent cap on interest includes all fees and extra costs, such as insurance