Liberals Propose Regulation of Payday Loans With Cap on Borrowing Rates: Budget 2023

A road side sign for a pay day loan store is shown in Oshawa, Ont., on May 13, 2017. (Doug Ives/The Canadian Press)

The federal government is proposing to regulate payday loans by placing a cap on borrowing rates, according to this year’s budget.

Released on March 28, Budget 2023 categorizes lenders who offer loans at “very high interest rates” as “predatory lenders.”

As first reported by Blacklock’s Reporter, the budget said these lenders “can take advantage” of low-income Canadians, newcomers, and seniors given their very high-interest loans.

The Criminal Code currently caps the legal interest rate at 60 percent effective annual interest. It is applicable to most lending products in Canada such as instalment loans, lines of credit, and auto loans.

The only exceptions in the provinces are payday loans of up to $1,500 for 62 days or less.

The finance department proposed to lower the rate to 35 percent, which is the rate in Quebec.

“Budget 2023 announces the government’s intention to adjust the Criminal Code’s payday lending exemption to require payday lenders to charge no more than $14 per $100 borrowed,” the federal department said.

Payday loans are typically two-week notes costing at maximum $15 per $100 borrowed, according to the Ontario government.

Critics have warned that the annual percentage interest rate (APR) for payday loans can reach over 400 percent. Consumer credit reporting agency Equifax defines APR as a number that represents the total yearly cost of borrowing money, expressed as a percentage of the principal loan amount.

Proponents, however, argue that payday loans fill a legitimate requirement for quick, easy-to-access cash to tide people over until they get their next cheque due to unforeseen financial shortfalls.

‘Unintended Consequences’

In 2018, bankers and credit unions testified before the Senate banking committee opposing a 21 percent interest cap, as proposed in Bill S-237, “An Act to amend the Criminal Code (criminal interest rate).”

Charles Docherty, then-senior counsel to the Canadian Bankers Association, told the committee that a cap on the interest rate would bring “unintended consequences.”

“Although clearly well-intentioned, Bill S-237, in our industry’s view, would have unintended consequences that could negatively impact the availability of credit in the financial services marketplace for short-term lending products and other products,” Docherty said.

He cited the example of bridge loans, which would be impacted by the bill.

“Consumers occasionally need a bridge loan to fund the purchase of a residence pending the completion of the sale of another property. These loans are for a very short period of time, and a fee is charged to cover the cost of the work required to process and complete the transaction,” said Docherty.

“Bill S-237 would undermine the ability of consumers to access these loans, which could impede the potential purchase of a new property.”

Marc-André Pigeon, then-vice president of Financial Sector Policy at the Canadian Credit Union Association, said the proposed reduced rate would “kneecap” their sector to offer competitive alternatives.

“[I]f this were to go through in the way it’s being proposed, there could be a consequence of people going to the unregulated sector,” Pigeon told the committee.

The Canadian Press contributed to this report.