BC borrowers now have more protections when it comes to taking out payday loans thanks to the recently-introduced legislation on high-cost loans.
Many British Columbians seek out easy-approval payday loans when fast cash is needed to cover a variety of expenses. Given the sky-high interest rates, and strict repayment plans payday loans have, many borrowers often find themselves in a never-ending cycle of mounting debt.
To counter this issue, lenders that offer high-cost loan products must now adhere to a more stringent regulatory framework that requires annual licensing and regulation by Consumer Protection BC.
These new rules came into effect May 1, 2022.
What Is Considered High-Cost Credit?
Under the regulation, high-interest loans are defined as high-interest instalment loans and lines of credit with interest rates over 32%. It also includes payday loans, which are notorious for their high-interest rates. More specifically, the regulations prohibit high-cost lenders from charging certain fees, establish credit agreement requirements, and enhance borrower rights.
Consumers who apply for a high-cost loan following the date of effect will first be informed of the risks so they can make a more informed decision about the financial product.
Why Is BC Implementing This Legislation?
The legislative framework is a result of the 2019 amendments made to the Business Practices and Consumer Protection Act, which require increased compliance among lenders. It closely follows a similar regulation enacted by the Quebec government in 2019.
While the payday lending sphere is already regulated in BC, the new legislation will strengthen regulations to provide additional protections to borrowers in BC who use high-credit products and services. Though other lenders that offer high-cost loans also fall under this umbrella, the regulation primarily targets payday lenders.
The regulation aims to establish transparency concerning loan products and associating costs.
According to a recent 2021 study on BC’s consumer debt by Sands & Associates, approximately 6% of consumers polled claim that payday loans are their main type of debt. The goal is to help consumers holding payday loans to be in a better position to handle such financial products without the risk of being caught in the vicious debt cycle.
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How Will Consumers Be Protected By The Legislation In British Columbia?
The new legislation on high-cost lending will protect consumers in several ways:
Build Consumer Awareness
As part of the new regulations, a consumer financial education fund administered by Consumer Protection BC will provide BC consumers with enhanced financial literacy to better understand and manage personal finances.
Stricter Rules On Fees And Interest Rates
Right now, payday lenders in BC can charge a maximum of $15 for every $100 borrowed. For instance, if you take out a $500 payday loan, you can be charged no more than $75 in interest and fees. Furthermore, a loan cannot be any more than 50% of your paycheque.
Payday lenders will also be prohibited from issuing you more than one loan at a time and cannot rollover your loan. That means your loan cannot be renewed at an additional cost if you feel that you aren’t able to come up with the funds needed to repay your original loan.
In addition, the regulation has put the maximum capacity for borrowing at $1,500, stating the loan term cannot exceed 62 days.
The new regulations prohibit high-cost lenders from charging any fees in an attempt to process a dishonoured regularly scheduled payment.
Cancelling A Payday Loan
Borrowers in BC have one day after signing the loan agreement to cancel their payday loan contract without having to pay any penalty fees and without reason. This is what’s known as a “cooling-off period.”
In this case, the lender is required to draft a cancellation notice and deliver it to the borrower when the contract is signed. If the borrower wants to cancel the contract during the cooling-off period, the notice must be sent to the lender. However, the borrower must pay back the principal funds received, though no additional costs may be charged.
That said, BC borrowers can cancel a payday loan at any time if:
- The lender did not fully disclose the total cost of the loan
- The contract does not contain the mandatory clauses
- The borrower was not informed of the right to cancel within the cooling-off period
- The lender did not review the loan contract with the borrower as required by law
In BC, payday loan contracts must include several compulsory clauses, including the cooling-off period clause and a clause letting the borrower know that complaints about the payday lender can be sent to Consumer Protection BC. The borrower must sign the contract in order for it to be valid, which acknowledges that all clauses have been read and understood.
Are Payday Loans Restricted Anywhere Else In Canada?
The Quebec Government recently made it difficult for lenders to make a sizable profit on high-cost loans by reducing the AIR (annual interest rate) lenders can charge to 35%. Given the current laws in the province surrounding payday loans, this rate reduction limit has made it unprofitable and almost impossible for lenders to operate legally while providing payday loans. On a similar note, BC’s regulations on high-credit lending will also make it difficult for payday loan lenders from operating within the Atlantic province.
How Will Consumers Be Protected By The Legislation In Quebec?
As mentioned, Quebec has strong laws that make it very difficult for predatory lenders to take advantage of unsuspecting borrowers. Here are some ways that Quebec consumers are protected by legislation in the province.
Rules on Fees and Interests
In Quebec, there are certain rules that lenders who provide high-cost loans must adhere to:
- No more than 35% AIR can be charged
- The maximum loan amount is $1,500
- The maximum loan term is 62 days
- The payday loan must be repaid in full before a new loan can be given
- Rollover loans are not permitted
- Borrowers are allowed a 10-day cooling-off period to cancel their loan contract
- Lenders cannot ask borrowers to sign a form that transfers wages
- Lenders cannot sell products or services associated with the payday loan
Cancelling a Payday Loan
In Quebec, borrowers can take advantage of a 10-day cooling-off period. During this time, borrowers can cancel their payday loan without penalty. Borrowers are not required to use any specific form to exercise their right to cancel within the cooling-off period, and in certain cases, exercising this right is automatic.
In QC, borrowers do not have to sign specific clauses in the loan contract. Further, lenders are not required to review specific clauses, such as the credit rate.
BC vs. QC High-Cost Credit Regulations
When it comes to high-cost credit products like payday loans, BC and Quebec have slightly different rules and regulations to protect consumers:
|Lender Licence Must Be Issued By||Consumer Protection BC||Office de la protection du consommateur|
|Lender Licence Validity||Initially valid for 6 months, & will expire each October 31st||2 years|
|Interest Rate Threshold||32%||35%|
|Cooling-off period||1 day||10 days|
|Borrower must receive contract||When contract is signed||When contract is signed|
How To Protect Yourself From Predatory Lenders
Most lenders within the payday lending sector are legitimate, but some are involved in predatory practices that cause consumers to get into debt they can’t get out of.
For instance, some lenders may approve all borrowers without doing any due diligence to make sure the loan can be comfortably paid off, while others charge exorbitant rates and fees. To help protect yourself from such lenders, here are some tips to help protect yourself:
- Are there hidden fees? By law, lenders must be completely transparent about all fees associated with loans. Make sure the lender you are working with discloses all fees upfront, so you’re fully aware of the real cost of the loan before you sign a contract.
- Are they licensed? Legitimate payday lenders should have a business licence in the province they operate in. If you don’t see a licence number anywhere associated with the lender, find a different lender.
- Are they following the law? Before you apply for a loan, get familiar with the laws that lenders must follow in your province or territory. That way, you’ll know if the lender is violating any of the payday loan laws.
- Are they pressuring you? Legitimate payday lenders don’t put undue pressure on borrowers to sign a loan contract or pay questionable fees. If you feel like you’re being coerced, look for another lender.
Tips On Managing A Payday Loan
Before you apply for a payday loan, keep the following tips in mind to avoid any financial mishaps:
- Budget For Your Payday Loan And Other Bills. While you should have enough money to comfortably pay your payday loan off, you should make sure that you’ve got enough leftover to continue paying all your other bills.
- Have A Repayment Plan In Place. Before you apply for a payday loan — or any other type of loan — make sure you’ve come up with a repayment plan so you never miss a payment.
- Understand Your Rights. To avoid being a victim of predatory lenders, get familiar with borrowers’ rights when it comes to high-cost lending in your province or territory.
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FAQs On High-Cost Credit Legislation
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Payday loans are convenient and easy to get approved for, but they’re very expensive. Only apply for a payday loan as a last resort, and if you do, make sure you’re financially capable of covering the loan amount and the high rate and fees that come along with it.