In the 2023 Budget, the Government of Canada proposed to reduce the criminal interest rate from 47% APR to 35% APR. Capping the interest rate at 35% is meant to protect borrowers from predatory lending practices.
However, many question whether the proposed rate will bring more harm than good.
One of the many concerns is that the reduced rate may further limit a non-prime borrower’s access to credit, forcing them to rely on more expensive sources of borrowing like payday loans. With reduced access to credit, vulnerable Canadians may become more susceptible to scammers or illegal sources of lending.
The Ontario Association Of Chiefs Of Police (OACP) & The Canadian Lenders Association (CLA) Release Report
This week the OACP and the CLA released a joint report highlighting the risks of reducing the criminal interest rate from 47% to 35%. The report suggests that a lower maximum interest rate will “lead to a rise in illicit financial activities” and “restrict access to essential credit for approximately 4.7 million Canadians.” The full report, titled “A Rise in Illegal Lending and Criminal Activity”, underlines various concerning trends. Key findings include:
- Access to new credit could be seriously limiting for specific groups of Canadians (including newcomers and those with limited credit history).
- Canadians may be forced to rely on payday loans or even take out loans from lenders who operate illegally.
- Certain lenders could be forced to end their operations, limiting access to new credit even further for many individuals.
Our Take: Limited Options May Make More Canadians Susceptible To Loan Scams
Already, almost every day we speak to Canadians targeted by online loan scams. In fact, our customer service agents spend a significant amount of time daily helping victims of loan scams navigate through their situation. Unfortunately, the story is always the same. An individual with non-prime credit is dealing with an emergency or financial setback. They seek out quick access to an online loan and fall victim to a loan scam. These individuals often apply for financial services on fraudulent websites and are later targeted through scam text messages, phone calls, and emails.
High loan amounts and guaranteed approval are promised. Upfront payment is requested. Because these individuals can’t access new credit from a bank or traditional financial institution, they are relieved to find assistance accessing a much-needed loan.
Once the upfront payment is sent (often under the guise of loan insurance), these scammers are never heard of again. And the consumer not only doesn’t have the loan they needed, they are out anywhere from a couple hundred dollars to several thousand.
Does This Proposed Change Result In A Net Positive Or Negative For Credit-Constrained Canadians?
On the surface, it might appear that limiting interest rates would bring about savings for Canadians with limited access to credit.
On the other hand, if with this proposed change lenders who take the risk in lending to this segment of borrowers are no longer able to sustain a profitable business, they will cease to operate and borrowers will have fewer options. With a rising cost of living and sky-high rent, what options would these borrowers have left?
There is an interesting podcast on this topic from Freakonomics that we recommend: “Critics say short-term, high-interest loans are predatory, trapping borrowers in a cycle of debt. But some economists see them as a useful, if expensive, financial instrument for people who might otherwise not have access to cash.”
These are important questions to ask, and although we don’t necessarily have all the answers, we are concerned about the impact this change would have on our users and credit-constrained borrowers as a whole.
If we “restrict access to essential credit for approximately 4.7 million Canadians,” what are we leaving them with?
Not only do we fear, but we know, based on more than a decade of conversations with these Canadians, that we will see more and more vulnerable individuals fall victim to online loan scams. When you remove important options, these individuals will be forced to take greater risks, ignore the red flags, and ultimately become a target for loan scams.