New Interest Rate Cap: A Mixed Bag for Borrowers
Canada’s decision to lower its criminal interest rate has sparked debate among experts and consumer advocates about its potential benefits and risks. Effective January 1, the federal government reduced the maximum allowable interest rate for non-traditional loans from 48% to 35%, aiming to combat predatory lending practices and protect vulnerable Canadians.
The government emphasized that the change targets lenders who charge exorbitant rates and exploit those unable to access traditional credit. However, concerns have arisen that the policy may inadvertently push borrowers into the hands of illegal or unregulated lenders.
Bruce Sellery, CEO of Credit Canada, a non-profit credit counselling agency, expressed apprehension about the impact of the lower cap. “Every time you enact price controls, there are unintended consequences,” he said in an interview with CTVNews.ca. Sellery noted that subprime lenders may issue fewer loans as the reduced interest rates make lending less profitable, leaving borrowers with fewer options.
“This change will reduce the burden of interest marginally, but it’s not significant,” Sellery said. “Our real concern is that borrowers will turn to the black market, facing unregulated and often predatory lending practices.”
Sellery also highlighted the need to address the underlying causes of debt, such as housing affordability, living wages, and issues related to mental, family, and physical health.
Gary Schwartz, president of the Canadian Lenders Association (CLA), pointed out that not all alternative lenders are predatory. Schwartz emphasized that the problematic actors, such as payday lenders who charge interest rates as high as 300%, often operate outside CLA’s membership and regulatory oversight.
The criminal interest rate applies to all loans except for specific payday loans and tax rebate advances, according to government guidelines.
For those impacted by the reduced access to loans, Sellery offered practical advice to navigate their financial challenges:
- Record Debt Details: Create a comprehensive list of your debts, including interest rates, minimum payments, and due dates.
- Make Minimum Payments: Ensure timely payments to avoid further credit score damage.
- Develop a Plan: Explore ways to increase income and cut expenses. Consider reaching out to non-profit credit counsellors for free, confidential guidance.
- Learn Budgeting Skills: Utilize apps or free webinars to improve financial literacy and budgeting.
- Tackle Debt Strategically: Use the “debt avalanche” approach to pay off high-interest debts first or the “debt snowball” method to eliminate smaller debts for a sense of progress.
- Monitor Credit Scores: Sign up for free credit score tracking to identify areas for improvement.
- Seek Professional Advice: Consult with credit counsellors to explore options such as debt consolidation or consumer proposals.
“We aim to give people the tools and perspective to reset their financial circumstances,” Sellery said.
While the intent behind the lower interest rate is to protect consumers, the policy highlights the complexity of addressing systemic issues in Canada’s financial landscape. Balancing consumer protection with access to credit remains a challenge, and the long-term outcomes of this decision will likely depend on its implementation and complementary measures to tackle the root causes of debt.