Lower Criminal Interest Rate and Payday Cap

Summary#

The Canada Gazette published a proposal called the Criminal Interest Rate Regulations on December 23, 2023. The rules would put details around changes made by the Budget Implementation Act, 2023, No. 1 that lower the criminal interest cap in the Criminal Code to 35% APR, and would set limits and exemptions for certain loans. Interested people have 30 days to comment on the proposal.

What it does#

• Lowers the criminal interest rate in law to 35% APR (this change comes from the Budget Implementation Act, 2023, No. 1). The regulations explain which loans the new rate applies to and which are exempt.
• Exempts some business loans from the criminal cap:
  • Loans for businesses (borrower is not a natural person) of more than $10,000 and up to $500,000 are exempt if the APR is no more than 48%.
  • Loans over $500,000 are fully exempt (no federal cap under these rules).
  • Business loans of $10,000 or less remain subject to the criminal cap.
• Exempts small pawn (pawnbroking) loans:
  • Pawn loans under $1,000 are exempt if the APR is no more than 48%.
  • Pawn loans of $1,000 or more remain subject to the criminal cap.
• Sets a federal cap for payday loans in provinces that already regulate them:
  • Limits the total cost of borrowing to $14 per $100 borrowed (i.e., 14% of the loan amount).
  • Allows a one-time dishonoured cheque fee of up to $20 to be excluded from that calculation.
  • Does not include interest on outstanding balances in the $14 per $100 calculation (some provinces allow interest on unpaid amounts).
• Timing (proposed): final regulations would come into force a short period after publication in Canada Gazette, Part II to align with the Criminal Code changes. (This notice is for comment; it is not yet law.)

Who's affected#

• Payday loan borrowers — especially low-income people, women, recent immigrants, and Indigenous peoples who use payday loans more often than average. The government estimates over 600,000 payday borrowers in 2021.
• Payday lenders and some small lenders — they would face lower allowable charges and possible reductions in profit or market size.
• Pawnshops (pawnbrokers) — most small pawn loans would be treated differently from other high-cost loans.
• Small businesses and other commercial borrowers — some business lending would be exempt from the new criminal cap, depending on loan size.
• Provinces: the rules apply to provinces that have been designated as having payday loan regimes; Quebec and the territories have not been designated and so payday-style products there remain subject to the criminal rate unless otherwise changed.

Why it matters#

• The government aims to reduce predatory lending by lowering the legal criminal interest threshold from the previous standard (60% effective annual rate, about 48% APR) down to 35% APR. That should make very expensive credit harder to offer.
• The federal $14 per $100 cap puts a single national ceiling on payday lending in provinces that already allow payday loans. That harmonizes rules for many borrowers who previously faced different provincial limits.
• Predicted effects (from government analysis):
  • Consumers who keep access to payday loans would pay about $1.25 per $100 less on average, saving roughly $29.3 million in the first year across borrowers.
  • Payday lenders’ profits are expected to fall (about $30.7 million in the first year in the government’s model), which could reduce the number of lenders or outlets.
  • The government’s central estimate gives a positive net present value of about $18.2 million over the modeled period, but results are sensitive to market responses.
• There are trade-offs:
  • Some borrowers could lose access to payday loans and may face short-term harms (missed payments, higher bank fees, or turning to informal or illegal lenders).
  • Exempting certain business and small pawn loans aims to avoid blocking legitimate commercial financing and to keep small-value secured loans available.
• This is a proposed regulation open for comment (the 30-day comment period noted in the notice); the final text and exact start date will depend on the next steps after consultation.