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Our Response to Pushback on the Criminal Rate of Interest

Early this year, hundreds of thousands of borrowers across Canada received letters titled “Important notice affecting your access to a loan”. Our Policy Team responds.

  • Article
  • Policy and research

Tue Mar 26, 2024 by Momentum Staff

The Canadian Lenders Association wants you to believe that lowering interest rates will eliminate credit options. They are wrong.

Early this year, hundreds of thousands of borrowers across Canada received letters titled “Important notice affecting your access to a loan” from the Canadian Lenders Association (CLA) due to a planned change to lower the Criminal Rate of Interest (CRI). Momentum has advocated for years to lower the CRI to 35% annual percentage rate (APR), which will make high-cost credit more affordable for Canadian borrowers. The action taken by the CLA – a group that represents non-prime lenders – is concerning.

The information is misleading and targets consumers who are struggling to keep up with the rising cost of living. The language is designed to scare consumers into advocating to stop a change that is in their own best interests. 

Non-prime lenders are arguing that they will not be able to offer loans to consumers at 35%. For years, the allowable interest rate in Quebec has been 35%. Many of the non-prime lenders still do business in Quebec despite the long-standing interest cap. Interest rate limits make sense as a tool to reduce harmful debt. The US National Consumer Law Center has argued that “interest rate limits are the simplest, most effective way to stop predatory lending and to ensure that lenders make responsible loans that people can afford to repay without getting caught in a debt trap.” Research also indicates that many lenders can offer profitable loans that better serve lower-income consumers at 35% APR.

We recognize that lowering the CRI will reduce lenders' profits, but borrower interests must come first. The planned interest rate reductions will result in significant savings for those who need them most. The Department of Justice recently conducted a regulatory impact analysis and found that lowering the CRI will result in significant savings for borrowers. Their cost-benefit analysis found that changes to payday lending will save consumers $256 million in the first 10 years. The analysis also showed payday lenders will earn $238 million less in profits - certainly enough to stir up vocal opposition.

Opposition to lowering the CRI from the CLA claims 4.8 million consumers will lose access to safe credit options and will increase lending from illegal lenders. However, research shows that in jurisdictions where the APR is equal to or less than 35%,consumers are not turning to illegal lenders. Rather, borrowers are more likely to turn to friends and family, seek options from credit unions or non-profit organizations, or work more hours – all of which are more sustainable financial decisions that benefit consumers’ financial health.

We also know that non-prime borrowers are more often women, newcomers, Indigenous people, and individuals living on a lower income. The reality is that many of these more vulnerable borrowers are using high-cost credit to cover everyday costs. We recently heard from a borrower who took out an installment loan to pay for their rent and has struggled to manage their debt load. Borrowing an installment loan at 47% APR pushed them further into a debt cycle to the point they are now filing for a consumer proposal.

Denying vulnerable borrowers access to more affordable credit by not lowering the CRI perpetuates financial inequity. There is not enough evidence to support the claims that lowering the CRI will drive consumers to illegal credit. Instead, research demonstrates the positive impact of lower rates of interest on the financial wellbeing of consumers, and that offering less expensive loans remains viable and profitable for lenders. The Government of Canada needs to ignore the misleading information from the non-prime lending industry and limit the dangers of expensive debt, especially during the current rising cost of living crisis for many Canadians.

The research is clear: as life in Canada becomes more expensive, the projected savings for consumers through lowering the CRI will make it easier for Canadians to survive.