Kara Sears
In Canada, the criminal interest rate is the maximum rate at which a lender can charge interest on a loan before it becomes a crime. The criminal interest rate is currently 60% effective annual interest rate (EAR) or 47-48% annual percentage rate (APR). However, the Budget Implementation Act, 2023, No. 1, also known as Bill C-47, amends the Criminal Code and lowers the maximum interest rate to 35% APR. This change aims to combat predatory lending practices and alleviate concerns about borrowers becoming trapped in a cycle of debt. The new rate will not apply retroactively to existing credit agreements.
| Characteristics | Values |
|---|---|
| Date of the latest amendment | June 22, 2023 |
| Name of the amendment | Budget Implementation Act, 2023, No. 1 (“Bill C-47") |
| Previous maximum interest rate | 60% EAR or 47-48% APR |
| Current maximum interest rate | 35% APR |
| National interest limit for payday loans | 14% of the loan amount |
| Fee cap for dishonoured cheques | $20 |
| Excluded from the new criminal interest rate | Commercial Loans, Pawnbroking Loans, Payday Loans |
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What You'll Learn
Payday loans: 14% limit on borrowing costs
Payday loans are a form of credit that typically targets low-income individuals, newcomers to Canada, and those with limited credit history. The payday loan industry has been criticised for predatory lending practices that trap people in a cycle of debt. In response, the Canadian government introduced the Criminal Interest Rate Regulations in December 2023, which came into force in January 2024. These regulations amended Section 347 of the Criminal Code, lowering the maximum interest rate for payday loans to an annual percentage rate (APR) of 35%.
The new regulations specifically target payday loans, limiting the total cost of borrowing to 14% of the loan amount. This cap excludes additional charges authorised by provincial laws, such as fees or penalties under $20, and fees for defaulting on payments. This 14% limit is aligned with the lowest provincial limit on payday loan borrowing costs, which was previously set in Newfoundland and Labrador.
The impact of this regulatory change is expected to be significant. Firstly, it will reduce the maximum total cost of borrowing allowed for payday loans in certain provinces, bringing uniformity across the country. Secondly, it may push consumers towards payday loans, as traditional lenders may find it challenging to offer competitive rates within the new framework. This shift could increase the average number of loans taken out by each borrower, as payday lenders tend to issue loans to existing borrowers with positive repayment histories.
While the new regulations aim to protect borrowers from excessive interest rates, they have also sparked concerns. Some worry that without simultaneous reductions in the cost of borrowing for payday loans, consumers may be driven towards these high-interest alternatives. Additionally, lenders, especially in high-risk credit markets, may struggle to adapt to the new compliance standards.
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Criminal rate of interest: 35% APR
The criminal interest rate in Canada is the maximum rate at which a lender can charge interest on a loan before it becomes a crime. The criminal interest rate is currently 60% Effective Annual Rate (EAR), or approximately 47-48% Annual Percentage Rate (APR).
On June 22, 2023, the Budget Implementation Act, 2023, No. 1 (“Bill C-47”) received Royal Assent. One of the notable sections of Bill C-47 for lenders is the reduction in the maximum interest rate under Section 347 of the Criminal Code. The Act amends the Criminal Code and changes the criminal rate of interest from an EAR to an APR. The EAR has been used as the reference rate since 1980 when the criminal rate was first introduced. One notable difference between EAR and APR is that APR is based on simple interest, while EAR takes compound interest into account.
The new criminal rate of interest is defined as "an annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceed 35 per cent on the credit advanced". This change aligns the Criminal Code with stricter maximums currently in effect for consumers in the Province of Quebec. The proposed changes under Bill C-47 will not apply to existing credit agreements entered into before the changes come into force, and a date for this has not yet been set.
The criminal interest rate for pawnbroking loans where the amount of credit advanced is less than $1,000 remains at 48% APR. The proposed Regulations also do not apply the new criminal rate to loans greater than $10,000 and exempt loans greater than $500,000 from any maximum interest rate. These exemptions are permissive and will help small businesses attract capital investment for high-risk endeavours by offering high rates of return.
The new rate change was explained in the Government’s Regulatory Impact Analysis Statement, which was released in the Canada Gazette on December 23, 2023, alongside the Criminal Interest Rate Regulations. The purpose of the amendments was to alleviate concerns that the previous criminal interest rate was allowing people, particularly low-income Canadians, newcomers to Canada, and those with limited credit history, to become trapped in a cycle of debt.
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Pawnbroking loans: 48% APR
The maximum interest rate allowed by law in Canada has been a topic of recent discussion, with the government announcing changes to the Criminal Code to combat predatory lending practices and promote fair lending conditions for borrowers.
One notable change is the reduction of the maximum interest rate under Section 347 of the Criminal Code, which was previously set at 60% Effective Annual Rate (EAR) or approximately 48% Annual Percentage Rate (APR). The new Budget Implementation Act, or Bill C-47, lowers this rate to 35% APR, aligning with the maximum rate already in effect in Quebec.
However, there are exemptions to this new rate, including pawnbroking loans. Pawnbroking loans are unique in that they are secured against personal property, often items of value such as gold, silver, diamond jewellery, or prestigious watches. In the event of default, the pawnbroker's recourse is limited to seizing the pawned property, which reduces the risk of borrowers falling into a cycle of debt.
Considering this, the federal government has allowed a higher APR limit for pawnbroking loans. Pawnbroking loans under $1,000 will be subject to a 48% APR limit, while those over $1,000 will fall under the new 35% APR limit. This decision aims to balance protecting borrowers from predatory lending while ensuring lenders are not incentivized to circumvent the 35% APR rate limit.
It is important to note that the APR calculation includes various fees that may be charged by the lender in connection with the loan, such as administrative charges, legal fees, insurance charges, and appraisal or inspection service fees. The Cost of Borrowing (Trust and Loan Companies) Regulations outline the specific fees included and excluded in the APR calculation.
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Commercial loans: no rate limit above $500,000
For commercial loans over $500,000, there is no maximum interest rate set by Canadian law. This means that lenders and borrowers are free to negotiate and agree on any interest rate that they deem appropriate for the loan. This lack of a cap on interest rates gives lenders and borrowers the flexibility to structure their loan agreements according to their specific needs and risk assessments.
In the context of commercial lending, the removal of a rate limit above $500,000 recognises the unique nature of these loans. Commercial loans often involve larger sums of money and are used for business purposes, where the potential returns on investments can be significant. As such, the associated risks may warrant higher interest rates to compensate lenders for the potential risks they undertake.
Additionally, the absence of a rate cap allows for a more dynamic and responsive lending environment. Interest rates can be adjusted to reflect the current economic climate, market trends, and the specific circumstances of the borrower. This flexibility can be advantageous for businesses with unique financial needs or opportunities that fall outside traditional lending structures.
It's important to note that while there is no legal maximum interest rate for these commercial loans, other laws and regulations still apply. Lenders must adhere to relevant provincial and federal lending laws, contractual obligations, and common law principles to ensure fair and transparent lending practices.
The removal of the rate limit specifically for commercial loans above $500,000 strikes a balance between consumer protection and providing businesses with access to capital. This distinction in the law acknowledges the differing levels of financial sophistication and risk tolerance between individual consumers and commercial entities.
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Predatory lending: combatting practices with rate caps
Predatory lending is a pressing issue in Canada, with low-income Canadians, newcomers to the country, and those with limited credit history being the most vulnerable. To address this, the Canadian government has taken significant steps to combat predatory lending practices and promote fair lending conditions for borrowers.
Previously, the criminal interest rate in Canada was 60% Effective Annual Rate (EAR), or approximately 47-48% Annual Percentage Rate (APR). This rate had been in place for decades and was amended by the Budget Implementation Act, 2023, No. 1 (“Bill C-47”), which received Royal Assent on June 22, 2023. The Act amends section 347 of the Criminal Code, reducing the maximum interest rate and changing the calculation method from EAR to APR.
The new criminal interest rate, as defined by Bill C-47, is an "annual percentage rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds 35 per cent on the credit advanced." This change aligns with the stricter maximums in Quebec, which already had a 35% APR limit in place for consumers. The shift from EAR to APR is significant because APR is based on simple interest, while EAR considers compound interest.
The Criminal Interest Rate Regulations, published in the Canada Gazette on December 23, 2023, provide further details on the new criminal interest rate. These regulations invited public feedback and aimed to address predatory lending practices while reforming Canada's consumer financial protection framework. Notably, the regulations set a national cap for payday loans, limiting the total cost of borrowing to 14% of the loan amount, excluding certain additional charges. This cap aims to reduce the maximum borrowing cost allowed for payday loans in certain provinces. Additionally, a nationwide cap of $20 was set for the one-time fee that payday lenders can charge for dishonoured cheques.
While the new regulations are a positive step toward protecting borrowers, they also present challenges for lenders, particularly in high-risk credit markets. Some stakeholders have expressed concerns that lowering the criminal interest rate without reducing the cost of payday loans may push consumers towards these types of loans. Additionally, there are proposed exemptions to the criminal interest rate for commercial loans, with loans greater than $500,000 exempted from any maximum interest rate. These exemptions aim to support small businesses in attracting capital investment and managing risk.
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Frequently asked questions
The maximum interest rate allowed by law in Canada, also known as the criminal interest rate, is currently 60% effective annual interest rate (EAR) or 47-48% annual percentage rate (APR). However, as of June 22, 2023, the maximum rate will be lowered to 35% APR due to the passing of Bill C-47, which aims to combat predatory lending practices.
The criminal interest rate is the maximum rate at which a lender can charge interest on a loan before it becomes a crime.
Commercial loans, pawnbroking loans, and payday loans are exempt from the criminal interest rate.
The maximum interest rate for payday loans in Canada is 14% of the loan amount, excluding any additional charges specifically authorized by provincial laws, such as fees or penalties that are $20 or less.
