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In 2018, Marcia Bryan turned to one of the many payday lenders in her Mississauga neighbourhood to borrow money. Ms. Bryan’s father had passed away, and she was chipping in to ensure that her younger sister could go to university.

Ms. Bryan, who had used and paid off payday loans before, got a small instalment loan. She refinanced the loan multiple times to borrow more money. When the pandemic struck, she refinanced again to get $12,000. She paid $575 a month toward her loan, “doing whatever I had to do” to pay it back, until in 2022, when she realized the balance had barely budged.

It was only after going through credit counselling and consolidating all her debt that she learned her loan had an effective annual interest rate of 60 per cent, the current legal maximum in Canada. To compare, a conventional loan to a strong borrower from a big bank would generally come in below 10 per cent.

“I didn’t know what the interest was, I didn’t bother to ask because I was so happy to get the money,” she recalled.

The federal government is set to lower the maximum allowable interest rate on consumer loan products such as instalment and auto loans from the current 47-per-cent annual percentage rate (which translates to an effective annual interest rate of 60 per cent) to a 35-per-cent APR. It is also capping the interest payday lenders can charge at $14 per every $100 borrowed.

The measures were approved late last year in a budget-implementation bill but the government hasn’t yet announced when they’ll take effect.

In Tuesday’s federal budget, Ottawa said it would amend the Criminal Code to enhance enforcement of the criminal interest rate to prevent “harmful illegal lenders” from circumventing it. It also plans to work with the provinces to harmonize consumer protections across the country, including strengthening payday-loan regulations, enhancing transparency around high-cost loans and potentially limiting advertising of such products.

Ottawa has said the new interest rate is meant to protect lower-income, newcomer and other vulnerable Canadians who can’t qualify for loans through most traditional banks, from “predatory lenders.”

Payday loans, which are for amounts of $1,500 or lower, typically have two-week terms but can be paid back in up to 62 days, while instalment loans are larger balances that can be paid off over longer periods of time.

Experts and advocates for low-income Canadians are divided on how effective the changes will be.

New payday loan rules will save borrowers $256.8-million but could increase use of loan sharks: Finance Department

The Canadian Lenders Association (CLA) – an industry group representing regulated lenders, including the big five banks and alternative lenders such as goeasy Ltd. and Fairstone Financial – launched a public campaign against the move. They said lenders would no longer be able to lend to millions of Canadians if the interest rate were lowered. Lenders also sent letters to some borrowers warning they could lose access to credit.

Non-prime borrowers are typically those with a credit score of less than 720. According to CLA research, using TransUnion of Canada data, of the 26.7 million Canadians with credit reports, 8.2 million, or 27.8 per cent, were considered non-prime.

Jason Mullins, president and chief executive officer at goeasy, told The Globe and Mail that a lower maximum rate will only make certain non-prime borrowers too risky and unprofitable for lenders to work with.

After a risk assessment of a borrower’s likelihood of defaulting on their loan, lenders factor in their operating expenses and minimum necessary profit margins to determine the interest rate they can lend at, Mr. Mullins said. (A risk assessment is based on factors such as income, credit score and history of working with a lender if they fell behind on payments.)

If the maximum allowable rate drops, “any consumers who based on their risk profile would have to be priced between those two points will lose access to credit,” he said.

Mr. Mullins warned that those Canadians will soon have to turn to payday lenders, or illegal lenders. While the new rate for payday lenders appears lower, it translates to a more than 300-per-cent APR, he said.

ACORN Canada, a national anti-poverty organization, has long advocated for the government to lower the maximum interest rate even further, to 20 per cent, saying that exorbitant interest payments are keeping non-prime borrowers trapped in a cycle of debt. ACORN’s own research found a 300-per-cent increase in the use of instalment loans between 2016 and 2020.

ACORN leader Donna Borden, who herself paid back $24,000 on a $10,000 instalment loan and was told by her lender that she still owed $7,000, criticized goeasy in particular for publicly advocating against the changes. In its quarterly and annual reports, the company has identified Quebec – which capped its maximum interest rate at 35-per-cent APR years ago – as a growth market.

Mr. Mullins said goeasy’s approval rate in Quebec was approximately 30-per-cent lower than the rest of Canada “because of this exact inability to approve certain borrowers.”

Chris Robinson, professor emeritus and senior scholar at York University, whose research includes the regulation of payday lending, called the proposals a “nice middle path to protect consumers.” He said the CLA was “fear-mongering,” and that the regulations would force alternative lenders to be more careful underwriters.

But Bruce Sellery, CEO of Credit Canada Debt Solutions, said the change “gets politicians some points, but it doesn’t solve the problem.” The non-profit, which gets about 10,000 calls annually, provides basic counselling support. Through its debt-consolidation program, it also negotiates with creditors to take the borrower’s interest rate to zero and gets borrowers on a four-year repayment plan.

The lower rate itself won’t materially affect borrowers, Mr. Sellery argued. “Let’s look at it. $1,000 at 35 per cent is $350, and $1,000 at 47 per cent is $470. Both those numbers are insane,” he said, adding later, “But for our clients, $120 is not going to make the difference.”

Those Canadians would be better served by improved financial literacy and coaching, mental-health supports and a living wage. He also called for the federal government to automatically distribute Canadians’ credit scores, and for better education around the factors that contribute to them.

“When our phones ring, people are stressed, they’re unclear about what they can do, and they’re desperate,” he said. “We need to support people to exhibit the behaviour that’s going to be positive for their future selves, and that’s exceedingly difficult for people to do [right now].”

Mr. Robinson said other changes, such as requiring banks to offer overdraft protection to all customers without a security check and bringing back postal banking, could help to reduce the need for payday lenders.

Editor’s note: A previous version of this article referred to Marcia Bryan by an incorrect surname. This version has been updated.

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