There’s a new limit on the rates Canadians are charged when they take out high-interest loans — a move aimed at preventing what the federal government calls “predatory lending practices.”
Effective Jan. 1, lenders are prohibited from charging Canadians an interest rate of more than 35 per cent on loans. Before the legislation changed, lenders could charge up to 47.9 per cent.
While payday lending is exempt from this change, there’s now a federal cap on how much payday lenders can charge in fees — $14 per $100 borrowed. That rate used to be regulated by provincial governments.
It mainly affects borrowers who aren’t eligible for traditional loans through banks, such as people with lower credit scores.
“Predatory lenders can take advantage of the most vulnerable people in our communities, including low-income Canadians, newcomers and seniors — often by extending very high interest rate loans,” said a statement from a spokesperson from the federal finance department.
The changes are being celebrated by advocates and organizations that work with lower-income Canadians who have struggled to repay loans with high interest rates. But associations representing alternative lenders argue it’s forcing them to turn away many customers who don’t qualify for loans with interest under 35 per cent, which could make them turn to illegal lenders.
Cycles of debt
In Calgary, the community impact director at Momentum — an organization that helps low-income Calgarians find jobs and manage their money — says a decade of advocacy has paid off.
Courtney Mo says many of the clients she’s worked with have taken out high-interest loans from alternative lenders during emergencies, and she says it’s common for people to get trapped in cycles of debt.
“While it can feel like somebody has thrown you a life preserver, in reality it’s more like a brick and it can really sink you,” said Mo.
She says Momentum was involved in getting the City of Calgary to create regulations to prevent payday loan lenders from clustering in low-income communities, as well as getting the province to reduce payday loan fee rates. She’s proud their advocacy has now contributed to a change at the federal level, she says.
For people who need access to bridge loans or emergency funds, Mo says she’s glad it’s a little more affordable and a little safer. But she hopes people exhaust all other options first, including turning to charities and other organizations that help those struggling with debt.
Half of clients turned down
The alternative lending industry, however, says the changes could leave Canadians who have low credit scores shut out of the credit market.
The CEO of Money Mart, which has over 500 locations across Canada, says they’re already rejecting unsecured personal loan requests from customers who are “too risky to lend to now,” just days into the change.
“The only way for us to manage that is just not to approve a segment of customers that we used to. And that, unfortunately, is a segment of the people that are most in need of help,” said Peter Kalen in an interview with CBC News.
“I would say we’re approving half as many as we were before.”
When customers don’t qualify for unsecured loans, he said his company offers payday loans instead — short-term loans meant to give consumers the funds necessary to make ends meet just until their next paycheque arrives. Those loans aren’t tied to credit scores.
According to the federal government, the new $14 cap on payday loan fees per $100 borrowed equates to an annual interest rate of approximately 365 per cent.
Kalen said he worries more borrowers will be forced to turn to illegal lenders — those who charge above the legal rate of interest (known as the criminal interest rate). They are the true predatory lenders, not companies like his, Kalen said.
The Canadian Lenders Association, which represents alternative lenders but not the payday lending sector, echoes the same concerns.
“More than one-in-four Canadians rely on non-prime sources of credit, and 92 per cent of those who use them do so primarily to pay for essential expenses. These loans help Canadians rebuild their credit — but now millions won’t have that chance,” said Gary Schwartz, the association’s chief executive officer, in a statement.
Under the Criminal Code, those found to be charging interest rates above the maximum limit could face two years in prison or fines up to $25,000.
Pawn loans below $1,000, as well as commercial loans valued between $10,000 and $50,000, are exempted from the 35 per cent criminal interest rate.