Lenders and Police Warn About Criminal Interest Rate Caps

Learn why lenders and law enforcement are sounding the alarm on capping criminal interest rates. Stay informed and protect your finances.

A proposed plan by the Liberal government to crack down on predatory lending has sparked concerns from police and lenders, who argue that it could inadvertently lead to a rise in crime and put vulnerable Canadians at further risk. The plan includes capping the criminal rate of interest at 35 per cent on an annualized percentage rate basis, down from the current 47 per cent APR. While these measures have been passed into law as part of the Budget Implementation Act in 2023, they have not yet come into force, according to the federal government.

The Ontario Association of Chiefs of Police (OACP) and the Canadian Lenders Association (CLA) released a report studying the potential impact of the proposed plan. According to the report, limiting the maximum allowable interest rate in Canada could create a "vacuum for criminals to fill" potentially leading to unintended consequences. The report estimates that 4.7 million Canadians will see their access to credit restricted by the cap, with newcomers and individuals with limited lending history being most at risk.

The report also studied other jurisdictions, such as Quebec, the United Kingdom, and California, where similar caps were put in place and resulted in unintended consequences. For example, Quebec's licensing limits on interest rates led to an increase in online markets for high-interest microloans as providers circumvented provincial regulations.

The CLA has called on the federal government to conduct a review of the policy and find an approach that protects Canadian access to credit while safeguarding the security of the financial system. However, a spokesperson for Finance Minister Chrystia Freeland stated that the amendments to the criminal interest rate are in the best interest of vulnerable Canadians.

In the fall of 2023, the Liberal government launched a consultation about lowering the criminal rate of interest even further, as well as addressing exemptions in the payday loan industry. A cost-benefit analysis of the proposed limits found that while fewer Canadians would access payday loans as a result of the legislation, some subprime borrowers would face other financial penalties tied to late payments on other obligations.

The federal government's analysis also found that profits from impacted lenders could decrease by as much as 50 per cent in the first year of the policies, potentially leading to a jump in the number of Canadians accessing payday loans from online or black market providers.

The proposed plan to crackdown on predatory lending has raised concerns about potential unintended consequences, including a rise in crime and restricted access to credit for vulnerable Canadians. The debate continues as the federal government considers further amendments to the criminal interest rate and exemptions in the payday loan industry.