The Financial Consumer Agency of Canada is responsible for protecting the rights and interests of consumers of financial products and services. But does that include high-interest loan products?
Millions of Canadians have little or no access to the lending market due to poor credit. Excluded from mainstream financial institutions, this class of borrowers must seek financing solutions elsewhere. Often, this entails turning to the alternative lending market. An industry rife with high-cost loans and, at times, predatory lending practices.
Are there any laws and regulations in place to protect vulnerable borrowers?
What Qualifies As A High-Interest Loan In Canada?
Alternative lenders are high-cost loan providers that operate outside of traditional banking institutions. Some of the credit products offered by alternative lenders include installment loans, lines of credit, payday loans, and debt consolidation loans.
At the federal level, regulations aimed at alternative lenders are sparse. The only law applicable nationally stipulates the maximum interest rate an alternative lender may legally charge under the Criminal Code, an effective rate of interest (EAR) of 60%.
| Description | Criminal Interest Rate | |
| Annual Percentage Rate (APR) | APR factors in all the fees and interest costs. | 47% |
| Effective Annual Rate (EAR) Or Annual Percentage Yield (APY) | EAR/APY factors in all the fees and interest costs, but it also factors in the effect of compounding interest. | 60% |
*Note: As part of the 2023 Budget, the Canadian government will reduce the APR criminal interest rate from 47% to 35% APR starting 2025.
Are There Provincial Laws That Regulate High-Cost Credit Lenders?
At the provincial level, there are more specific laws that govern alternative lending practices. Some provinces’ laws are more stringent than others. Still, collectively they’ve dramatically reduced the rates alternative lenders can charge on credit products such as personal loans and auto title loans.
Currently, only British Columbia, Alberta, Manitoba, Newfoundland and Quebec have a high-cost credit legislation in effect.
High-Interest Loan Legislation In Alberta
The High-Cost Credit Regulation in Alberta outlines a set of rules aimed at firms that issue high-cost credit products, such as title loans, lines of credit, installment loans, rent-to-own transactions, and pawnshop loans.
The regulations are part of the province’s Consumer Protection Act, whose goal is to address, discourage, and punish unethical business practices online and offline. The High-Cost Credit Regulation became effective on January 1, 2009.
In Alberta, any credit product with an annual interest rate of at least 32% is designated as high-cost and subject to the legislation. This threshold applies to both fixed credit products and open credit products, like a line of credit.
| Max Interest Rate | While Alberta doesn’t have any regulations on the interest a lender can charge, there are federal regulations. All lenders must respect the federal Criminal Code interest rate limit of 60% (APY), which is equivalent to 47% (APR). |
| Fee Caps | While there are no provincial caps on fee charges, there are federal rules. The total fees, cost and interest of a high-cost personal loan cannot be more than the criminal interest rate of 47% APR. |
| Licensing Requirements | All high-cost credit lenders in Alberta must be licensed. |
| Debt Collection Rules | High-cost lenders in Alberta cannot do the following when trying to collect outstanding debts: - Threaten or harass borrowers - Call third parties regarding borrowers - Call borrowers between 10 pm and 7 am |
High-Interest Loan Legislation In Quebec
Under Quebec law, a credit product is considered “high-cost” if it meets the following criterion: the interest rate is higher than the sum of the Bank of Canada’s Bank Rate plus 22%. This threshold applies to all types of credit products.
| Max Interest Rate | While Quebec doesn’t have any regulations on the interest a lender can charge, there are federal regulations. All lenders must respect the federal Criminal Code interest rate limit of 60% (APY), which is equivalent to 47% (APR). |
| Fee Caps | While there are no provincial caps on fee charges, there are federal rules. The total fees, cost and interest of a high-cost personal loan cannot be more than the criminal interest rate of 47% APR. |
| Licensing Requirements | Any lender who issues you a high-cost credit loan must hold a permit from the Office de la protection du consummator. This permit is mandatory for both offline and online businesses. If the contract entails the lender loaning you money, they’re also required to have a money lender’s permit. To verify if your lender holds these permits, type in their name here. |
| Debt Collection Rules | While there are consumer protection rules on how collection agencies can contact borrowers, none such exist for high-cost credit lenders in Quebec. |
High-Interest Loan Legislation In Manitoba
In Manitoba, a loan is considered “high-cost” if the annual interest rate exceeds 32%. While Manitoba doesn’t have any caps on interest these lenders can charge, they do have rules on what the lenders must disclose.
The lender must disclose the following details to borrowers:
- APR
- Loan term
- Loan principal
- Annual interest rate
- Fees that will or may be payable
- Total cost of the loan
- Cancellation rights
In addition, borrowers have the right to cancel a credit contract 48 hours from the time it’s signed and pay back the loan early without incurring a penalty.
| Max Interest Rate | Manitoba doesn’t have any regulations on the interest a lender can charge. However, all lenders must respect the federal Criminal Code interest rate limit of 60% (APY), which is equivalent to 47% (APR). |
| Fee Caps | While there are no provincial caps on fee charges, there are federal rules. The total fees, cost and interest of a high-cost personal loan cannot be more than the criminal interest rate of 47% APR. |
| Licensing Requirements | Manitoba legislation requires lenders to obtain a license through the Consumer Protection Office before offering high-cost credit products to borrowers. Each lender must operate under only the name and style of business specified in the licence agreement. They must also obtain a separate license for each location they operate in. |
| Debt Collection Rules | While there are consumer protection rules on how collection agencies can contact borrowers, none such exist for high-cost credit lenders in Manitoba. |
High-Interest Loan Legislation In British Columbia
On February 26, 2019, Bill 7 – Business Practices and Consumer Protection Amendment Act, 2019 (Bill) was introduced to outline a series of proposed changes to rules governing high-cost credit products in British Columbia. The bill is part of the province’s Consumer Financial Protection Action Plan.
The government of B.C. will enact rules similar to those of other provinces, though their approach is expected to be more stringent on some matters. Bill 7 would affect fixed credit products, open credit products, leases, and other high-interest products with an interest rate higher than the prescribed rate specified in the regulations. British Columbia will likely choose a rate of 32%, which would be in line with other provinces.
| Max Interest Rate | In BC, there is no maximum interest that a high-cost credit lender can charge, as long as the APY does not exceed 60%, as per Section 347 of the Criminal Code. |
| Fee Caps | While there are no provincial caps on fee charges, there are federal rules. The total fees, cost and interest of a high-cost personal loan cannot be more than the criminal interest rate of 60% APY. |
| Do Lenders Require A License? | High-cost credit lenders must be licensed in BC and comply with requirements under the Business Practices and Consumer Protection Act. This license number must be clearly displayed on the high-cost credit lender's storefront or website. |
| Debt Collection Rules | When collecting debt, high-cost credit lenders have rules to follow under the Business Practices and Consumer Protection Act. Lenders cannot: - Collect a debt payment before the due date. - Require information that would give the lender direct access to a borrower's bank account. - Use account information for any purpose other than to process a pre-authorized payment. - Use threatening, intimidating or coercive language in an attempt to collect unpaid debt. - Communicate with the borrower's family, neighbours, friends, or employer in a manner that is considered harassment. - Collect debt payments until the borrower has been informed in writing. - Communicate with a borrower to collect a debt until five days after written notice has been provided. |
When it comes to cancellation rights, borrowers can void the credit contract should the lender fail to:
- Include any of the requirements mandated in the proposed legislation (of which there are 28)
- Inform them of any critical matters that could sway their decision to sign the contract
- Advise of the cooling-off period
- Provide them with a copy of the agreement and cancellation notice
Does Ontario Have Any Regulations To Protect Consumers From High-Cost Credit Lenders?
Ontario is considering implementing stricter rules for alternative lenders to protect consumers better. In January 2021, a proposal was drafted outlining a series of steps to improve business practices in the high-cost credit industry. The proposal was prepared after a comprehensive review of the Consumer Protection Act, 2002, which governs consumer transactions in the marketplace.
| Max Interest Rate | Currently, there are no provincial interest rates or fee limits on high-cost credit lenders (other than payday lenders) in Ontario. However, lenders must follow the federal Criminal Code interest rate limit of 60% (APY), which is equivalent to 47% (APR). |
| Fee Caps | While there are no provincial caps on fee charges, there are federal rules. The total fees, cost and interest of a high-cost personal loan cannot be more than the criminal interest rate of 47% APR. |
| Licensing Requirements | Alternative lenders (other than payday lenders) are not required to be licensed in Ontario. |
| Debt Collection Rules | While there are consumer protection rules on how collection agencies can contact borrowers, none such exist for high-cost credit lenders (other than payday lenders). |
Bottom Line On High-Interest Loans In Canada
As more consumers seek alternative lenders to obtain high-cost credit products, governments across Canada will have to keep pace on the legislative front to ensure they operate their business fairly and ethically.
Borrowers with bad credit face many struggles and challenges regarding their finances, which makes them vulnerable to exploitation by unscrupulous lenders. Though most high-cost credit lenders operate in an honest, transparent, and ethical way, the few who do not can tarnish the industry’s reputation. For this reason, legislation in provinces like Alberta and British Columbia can play a critical role in ensuring the industry works for both borrowers and lenders. However, most provinces have yet to follow in their footsteps – it may take some time before such regulations are instituted across the country.
