Curious about how high interest rates can legally go in Canada? Understanding Canada’s criminal interest rate is essential for borrowers and lenders alike.
To protect Canadians from predatory lenders, the government has set a cap on how much interest lenders may charge consumers. This guide breaks down what the criminal interest rate is, how it’s applied with various loan types, and what borrowers should keep in mind when applying for credit.
Key Points
- The criminal interest rate in Canada was introduced by the Canadian government as a way to protect consumers from predatory lending by legally capping how much interest lenders can charge.
- The current criminal interest rate is 35%, which means lenders are not permitted to charge any more than this rate on credit products.
- While a cap of 35% can help consumers save money when borrowing, it can also negatively affect lenders’ profit margins, leaving fewer lenders in the lending sphere and fewer options for subprime consumers.
What Is The Criminal Interest Rate In Canada?
The current criminal rate of interest in Canada is 35%. Charging more than this limit is a criminal offence under Section 347 of the Canadian Criminal Code. This applies to all types of financing arrangements, aimed at protecting borrowers from excessively high lending rates.
However, payday loans are an exception. While the criminal interest rate of 35% applies to high-cost credit lenders, payday lenders are not included. The federal cap for payday lenders is $14 per $100 borrowed. This can translate to an APR of roughly 365%.
| Example: Loan Amount: $1,500 Fee: $14 per $100 Loan Term: 14 days Loan Cost: $210 Total Repayment: $1,710 |
Learn more: What Are Payday Loan Interest Rates In Canada?
What Is The History Behind Canada’s Criminal Interest Rate?
The criminal interest rate in Canada was first implemented in 1980 under Prime Minister Pierre Trudeau. The goal was to deter loan sharks from charging higher rates and using intimidation.
This regulation particularly helped those who are most vulnerable to predatory lending, such as seniors, newcomers, low-income Canadians and low-credit consumers. The law capped the legal interest rate at 60% effective annual rate (EAR) or annual percentage rate (APR). An APR calculates all fees and compounding interest and tells how much a lender makes on a loan.
What Types Of Loans Are Affected?
The criminal interest rate in Canada applies to most consumer and business loans, including the following:
- Credit cards
- Personal loans
- Installment loans
- Lines of credit
The Criminal Interest Rate & Its Effect On Canadian Borrowers: Pros & Cons
The criminal interest rate cap of 35% can have both positive and negative effects on borrowers in Canada.
Pros:
- Lower Borrowing Costs: A maximum interest rate of 35% means consumers will not be subject to rates any higher than this threshold, which helps them save money when borrowing.
- Consumer Protection: This rate cap also protects consumers — especially vulnerable ones — from predatory lenders who lurk in high-cost credit circles.
- Standardized Caps: The criminal interest rate sets a standard across Canada for lending rates, ensuring fair treatment of consumers and transparency in fees, particularly for high-cost credit products.
Cons:
- Reduced Credit Access: According to the Canadian Lenders Association (CLA), a lower maximum allowable interest rate may hurt millions of Canadians. More specifically, subprime or credit-constrained consumers are most affected because the rate cap can restrict access to credit for those with lower credit scores or limited financial histories.
- Fewer Loan Options: Many alternative lenders rely on higher rates to offset the risk of working with less-qualified borrowers. A lower rate cap means some lenders may exit the market, leaving more vulnerable borrowers with fewer loan options.
- Stricter Lending Requirements: Lenders may also tighten their approval criteria, making it more difficult for many consumers to access loan products.
How Does The Criminal Interest Rate Affect Businesses?
Raising capital to start a business is tough. Most banks won’t lend to small businesses or startups. While some businesses may be lucky enough to get venture capitalists (VC) funding, others need to find other means of financing.
Unfortunately, banks are not the most inclusive providers. Instead, some businesses may need subprime lenders who provide funding to individuals and businesses based on a wider set of criteria. Others may not be able to get the funding at all to start or grow their businesses.
Learn more: Might A Lowered Maximum Interest Rate Negatively Impact Credit-Constrained Canadians?
Who Can Benefit From A Cap On The Criminal Interest Rate?
Consumers who use their credit cards for cash advances may benefit from a rate cap. Credit card cash advances carry high-interest rates and charges from day 1 of the transaction.
How Does The Criminal Interest Rate Affect Alternative Lenders?
Alternative lenders typically work with bad credit borrowers who struggle to secure loans with traditional lenders. In exchange for this flexibility — and therefore higher risk — alternative lenders charge more interest. However, a cap of 35% can hinder profitability and therefore minimize access to these types of loans.
Many of these high-interest lenders lend on a small scale. They are small businesses and they employ Canadians. With a lower criminal rate of interest, their ability to offer loans will be limited, thereby reducing their competitiveness.
Learn more: Borrower Rights: High-Interest Loan Legislation In Canada
Why Do Banks Charge Lower Rates Than Private Lenders?
In Canada, banks and credit unions charge more affordable interest rates compared to private lenders. Banks are for-profit businesses and generate substantial revenue.
There are many reasons why banks charge lower rates, including the following.
Banks Have Access To Cheaper Funding
Simply based on the way a bank runs, they have access to more affordable capital than private lenders. In general, banks are able to borrow money at a much lower rate from the Bank of Canada. Therefore, they are able to charge lower interest rates.
Banks Are Larger
Private lenders are often small businesses that have higher operating costs. Banks, on the other hand, are large and able to reduce operating costs because of their scale. This means that the administration cost associated with one loan is lower for banks, which allows them to earn a profit even when they charge lower interest rates.
Diversification
Again, because of their scale and how they operate, banks have a large and more diversified portfolio of assets. They do not rely only on profits from loans, which means that they’re able to maintain profit even when a loan goes into default.
Lower Default Rates
Banks have more strict lending requirements and underwriting processes. This can lead to a lower rate of default. The risk of loss because of default is therefore lower for banks than for alternative lenders.
Bottom Line
Canada’s criminal interest rate aims to ensure fair lending practices and minimize financial exploitation. By capping rates on loan products it protects consumers from predatory practices and excessive debt. However, these lending caps can also reduce lender profits, prompting some to exit the lending industry, leaving bad credit consumers with fewer options. As a borrower, it’s crucial to understand all loan costs and compare lenders to ensure you’re getting the best deal and are treated fairly.
