New year brings Canadian crackdown on high-interest loans

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In a little-noticed move that industry groups say could drive Canadians into the arms of black market loan sharks, Ottawa has made it a criminal offence to offer loans at any interest rate higher than 35 per cent per year.

The federal government has also capped payday loan fees at $14 for every $100 borrowed.

Although pitched by the Trudeau government as a crackdown on “predatory lenders,” the credit counselling agency Credit Canada warned in a Jan. 2 statement that the actual effect would be to boost business for illegal predatory lenders.

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CEO Bruce Sellery said that the high-interest loan market primarily serves Canadians with bad credit who “can’t qualify for loans from traditional lenders.”

As such, with the cutoff now lowered, Sellery said they’ll be forced to turn to “pawn shops, illegal lenders, or offshore borrowing.”

Pawn shops are exempt from the new regulations, provided the loan is less than $1,000 and any default simply results in “the seizure of the pawned property.”

Canada has had a “criminal interest rate” ever since 1980. As per the Criminal Code, anybody who offers loans at a “criminal rate” risks two years’ imprisonment or fines of up to $25,000.

Until Jan. 1, the criminal rate was equivalent to 48 per cent per year.

The actual advertised rate of the loan might be lower; but the 48 per cent is meant to capture the total costs that a loan would accumulate over the course of a calendar year.

If a $100 loan could rack up $48 in fees, late charges and compounded interest over 12 months, it was considered a criminal loan.

Under the new order, that annual rate has now dropped to 35 per cent. It’s the first time that the federal criminal interest rate has been lowered, although Quebec already had its own maximum interest rate of 35 per cent.

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“If (lenders) can’t lend profitably at 35 per cent APR, they’ll tighten their lending criteria and issue fewer loans. Canadians who would have qualified at 48 per cent may now be shut out of the credit market entirely,” said Sellery.

Although the new rate is just entering into force, it was first introduced as part of the 2023 federal budget. Under a section headlined “Cracking Down on Predatory Lending,” it said high-interest lenders take advantage of the “most vulnerable people in our communities.”

“The current criminal rate of interest … can trap Canadians in a cycle of debt that they cannot afford and cannot escape,” it read.

The budget even provided a fictional example of a Guelph woman named “Hannah” forced to take out a two-year $5,000 high-interest loan to fix her car. The loan still ends up costing about $3,500 in interest at the maximum rate, but due to the lowered criminal interest rate “she will have saved $775 over the life of the loan.”

In a blog post written in advance of the new criminal interest rate, the law firm Bennett Jones praised the new terms for providing “certainty” to the high-interest loan sector.

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Although the new rules lower the criminal interest rate, they also make clear what kinds of loans aren’t subject to it. For instance, if a loan is extended to a corporation and is more than $500,000, there are no rules whatsoever on how high the interest rate can be. “The corresponding regulations will result in many commercial facilities being exempt from the criminal interest provisions which will not only provide certainty but increased flexibility to structure creative financing solutions, including the granting of warrants,” wrote Bennett Jones.

The new criminal interest rate is part of a suite of new laws and regulations which officially came into force on New Year’s Day.

The Canada Child Benefit is now paid out to parents for up to six months after the death of a child, rather than cutting off at the moment of the child’s death.

Canadian tax brackets were also pushed up to account for inflation. In 2024, Canadians had to earn less than $14,538 to be exempt from federal tax. As of Jan. 1, that’s now been raised to $16,129 to account for higher prices and decreases in buying power.

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