Predatory Lending: Latest changes to the Criminal Code and what they mean for you

Predatory lending has long been a contentious issue in Canada, with payday lenders and other high-interest loan providers coming under fire for taking advantage of vulnerable and low-income borrowers. But now, the Canadian Federal Government is taking action to rein in these lenders and protect consumers.

As part of its 2023 Financial Budget, the Federal Government has proposed changes to the Criminal Code that would lower the maximum interest rates and fees that payday lenders can charge. Before we dig into these changes and how they could impact borrowers like you, let’s start by understanding what can be classified as predatory lending.

What is predatory lending and how is the Federal Government cracking down on it?

Predatory lending refers to the unethical (and sometimes illegal) lending practices that take advantage of vulnerable borrowers. Predatory lenders may offer loans that have excessively high fees, interest rates, and other terms that are designed to trap borrowers in a cycle of debt. Some of the common tactics they resort to include excessive fees, balloon payments, loan flipping, and asset-based lending, among others. Predatory lenders often target people who have exhausted conventional options to get a loan, making it difficult for borrowers to shop around.

The most common types of predatory loans include payday loans, title loans, and high-interest installment loans. Let’s take a look at all three types and how they differ from each other:

Payday loans are short-term loans that are typically due on the borrower's next payday. They are granted based on your income and have extremely high interest rates. Payday loans, sometimes also called cash advances, are usually preferred by people looking for immediate cash. These types of loans don’t need you to put up collateral, making it a not-so-secure and risky arrangement.

Title loans, also called auto title loans, are loans that require the borrower to put up their car as collateral. These loans often have high interest rates and can lead to the borrower losing their car if they are unable to repay the loan.

High-interest installment loans are loans that have high interest rates and long repayment periods. These loans are often marketed to people with poor credit who are unable to obtain traditional loans. The high interest rates and long repayment periods can lead to the borrower paying back much more than they borrowed.

Now coming to the part about how the Canadian Federal Government plans to crack down on predatory lending. The first measure is by proposing to lower the maximum annual interest rate, which will affect all three types of predatory loans listed above. The 2023 Budget will also specifically target payday loans as one of the proposed changes is to the maximum amount payday lenders can charge borrowers.

What changes are being proposed to the Criminal Code to protect consumers from high-interest loans?

Before we get into the changes proposed by the Federal Government to the Criminal Code, let’s first look at what purpose the Criminal Code serves. The Criminal Code of Canada sets a limit on how much interest a lender can charge on a loan. If a lender charges interest above this rate, they can be charged with a criminal offense. The provision is meant to protect borrowers from being charged exorbitant interest rates that could put them in a difficult financial situation.

The first change that’s proposed by the Federal Government to the Criminal Code in the 2023 Budget is moving from an effective annual rate to an annual percentage rate.

Effective Annual Rate or EAR and Annual Percentage Rate or APR are both formulas that aim to provide a standardized way of measuring the cost of a loan over time, taking into account various fees associated with the loan.

APR is a measure of the total cost of borrowing money on an annual basis, and it is expressed as a percentage of the loan amount. It includes both the interest rate and any fees associated with the loan. For example, if you borrow $1000 with an APR of 10%, you will pay $100 in interest and fees to the lender over the year. It's important to note that APR does not include any compounding of interest over time.

EAR, on the other hand, takes into account the effect of compounding interest over time. EAR is always higher than the APR for the same loan since it includes the compounding of interest.

What is the current criminal interest rate, and how will it be lowered?

The second proposed change to the Criminal Code is lowering the criminal interest rate from 47% APR (which is the equivalent of 60% EAR that’s currently in place right now) to 35% APR. This proposed change will bring the federal criminal interest rate in line with the maximum interest rate cap currently in place in Quebec.

What is the payday lending exemption, and how is the Federal Government adjusting it?

As we discussed before, payday loans are short-term loans that are typically due on the borrower's next payday. These loans have extremely high interest rates and are exempt from the Criminal Code’s interest rate cap. To avoid this loophole and adjust the payday lending exemption, the third change proposed in the 2023 Budget is to put a cap on the amount payday lenders may charge borrowers to no more than $14 per $100 borrowed.

Best practices to help you avoid predatory lending

While the Government is taking steps to crack down on predatory lending, you, as a consumer, need to educate yourself and be aware of the risks associated with getting a loan from an unsecured institution. It's important to be aware of the potential risks associated with predatory loans. Here are some best practices to help you avoid predatory loans:

• Shop around: Before accepting a loan, make sure to shop around and compare offers from different lenders. Look for lenders with a good reputation, reasonable interest rates, and clear terms and conditions.

• Read the fine print: Make sure to carefully read the loan agreement and understand all the terms and conditions. Pay attention to fees, interest rates, and repayment terms.

• Avoid loans with high-interest rates: High-interest loans can be very costly to repay. If possible, look for loans with lower interest rates or consider alternative options, such as credit unions or peer-to-peer lending platforms.

• Don't borrow more than you need: Borrow only what you need and can afford to repay. Predatory lenders may try to convince you to borrow more than you need, but this can lead to a cycle of debt.

• Ask questions: If you have any questions or concerns about the loan, don't be afraid to ask the lender. A reputable lender will be happy to answer your questions and provide you with the information you need to make an informed decision.

Educate yourself, ask people around you, and don’t rush into anything. Find a loan that meets your needs without putting you at risk of financial harm.

Conclusion

To summarize, predatory lenders resort to aggressive sales tactics and take advantage of people who may not fully understand financial transactions or have limited income, poor credit scores, or limited access to education. By introducing measures to tackle predatory lending, the Federal Government has taken a step in the right direction to curb the exploitation of vulnerable borrowers. But ultimately, the onus is also on the borrower to educate themselves and be cautious when getting any type of loan from a traditional or a non-traditional source.