Criminal Interest Rate Regulations

Summary#

The federal government published the proposed Criminal Interest Rate Regulations in the Canada Gazette on December 23, 2023. The rules would set which loans are exempt from a newly lowered criminal interest rate and would cap the cost of payday loans at $14 per $100 borrowed; this is a proposal with a public comment period of 30 days and is not law yet.

What it does#

• Implements detail for an earlier law change (the Budget Implementation Act, 2023, No. 1) that lowered the criminal interest threshold to 35% APR (down from 60% effective annual rate, about 48% APR).
• Creates exemptions to the criminal interest rate (subject to conditions):
  • Commercial loans where the borrower is not a person:
    • Loans over $10,000 and up to $500,000 would be exempt if the APR is no more than 48%.
    • Loans over $500,000 would be exempt with no APR cap under these regulations.
    • Commercial loans $10,000 and under would still be subject to the criminal rate.
  • Small pawn (pawnbroking) loans:
    • Pawn loans under $1,000 would be exempt if the APR is no more than 48% and the lender’s only recourse is keeping the pledged item.
• Sets a federal limit on payday loans in provinces that have designated payday regimes:
  • Total cost limited to $14 per $100 borrowed.
  • One-time dishonoured cheque fee up to $20 would be allowed and excluded from the $14 calculation.
  • Interest on outstanding balances is not included in the $14 cap.
• Applies to loans entered into on or after the regulations come into force. The proposed documents say the final rules would come into effect in line with the Criminal Code amendments (a transition period of about three months after final publication is discussed).

Who's affected#

• Payday loan users — especially people who use short-term, small-dollar loans. The government’s analysis highlights that users tend to be lower-income people, including Indigenous peoples, recent immigrants, and women.
• Payday lenders and some small businesses that offer those loans. The government estimates there are over 1,000 payday lenders and about 600,000 payday borrowers (based on available data cited).
• Pawnbrokers and commercial lenders (business-to-business lending), which would see some transactions treated differently under the criminal-rate rules.
• Provincial regulators and police, who would continue to enforce criminal-rate rules and province-level payday rules in designated provinces.

Why it matters#

• The aim is to reduce predatory, very high-cost consumer credit by lowering the criminal interest threshold and by capping payday loan costs across designated provinces.
• The Department of Finance model estimates:
  • Consumer savings of about $29.3 million in the first year and $256.8 million over 10 years from lower payday loan charges.
  • Industry profit losses of about $30.7 million in the first year and $238.5 million over 10 years.
  • A modeled net present value benefit of $18.2 million over 10 years.
• The model also predicts fewer payday loans and fewer payday borrowers (about 93,000 fewer loans and over 44,000 fewer borrowers in the first year in the central scenario), which could help some borrowers avoid debt traps but could also leave others without any short-term credit. That could lead some people to miss payments, seek costlier alternatives, or — in a worst case — turn to illegal lenders.
• These are projected, modelled impacts from the government’s analysis. The rules are proposed and subject to change after the public comment period.