Long-awaited changes to the lending rules under the Criminal Code will protect some vulnerable Canadians, but still leave many susceptible to predatory payday loans and without means to build credit, experts say.
The payday loans industry offers short-term loans at high interest rates, and has been accused of taking advantage of vulnerable and low-income Canadians by trapping them in a cycle of borrowing more to pay previous debt.
The changes announced in the 2023 budget Tuesday are part of Ottawa’s emphasis on helping low-income Canadians as the cost of living continues to rise.
Lenders often offer two types of products: payday loans, which have a term of two weeks and a value of under $1,500, and instalment loans, which are for larger amounts and payable over a longer period.
Ottawa said it intends to lower the maximum charge for payday loans, which are exempt from other loan legislation, to $14 for each $100 loaned. On an annualized basis, this results in an annual interest rate of 336 per cent. Previously, this limit ranged by province from $14 to $17.
For all other loans, Ottawa plans to cap the interest rates at 35 per cent, down from the previous maximum cap of 47 per cent. It said it will also review whether these numbers should be lowered further.
By contrast, a conventional loan from a major bank for a business or mortgage typically falls under 10 per cent.
This change could save some Canadians hundreds of dollars, said Donna Borden, a representative of Association of Community Organizations for Reform Now, which represents low-income Canadians.
Ms. Borden said Ottawa should ensure that the 35-per-cent cap includes all added fees, which could add up to hundreds of dollars on top of interest payments.
However, some say the updated caps don’t fix the underlying problem: that there are few alternative sources of funds that don’t trap consumers in unaffordable cycles.
“It’s disappointing,” said Andreas Park, a professor of finance at the University of Toronto. “I would like them to address the underlying issue instead of using a Band-Aid solution.”
One such change could be requiring banks or other institutions to offer affordable short-term loans, which could also help low-income Canadians build credit. However, as they are considered high-risk loans, these types of programs are rarely seen as lucrative among major lenders.
Last September, Canada Post launched its own consumer loan program, offering consumer loans between $1,000 and $3,000. However, it paused the program indefinitely in November when Toronto-Dominion Bank TD-T, which is running the program, reported an apparent attack on the applications process. TD did not respond to questions about the program.
The measures to tighten lending rules have been seen as constrictive by the short-term loan industry. In an e-mailed statement, the Canadian Consumer Finance Association said it was “deeply disappointed” with the changes by the government.
The board of the association, which represents short-term loan companies, is made of executives from a number of payday loan companies, half of which are from Momentum Financial Services, formerly known as Money Mart.
“While it makes a good headline, the effect of the government’s action will not make credit more affordable. Instead it will have the effect of excluding access to credit to those Canadians on the bottom rungs of the credit ladder,” it said in the statement.