Criminal Interest Rates in Canada and Payday Loans
Payday loans and other quick cash businesses typically charge high rates of interest in comparison with secured loans. In Canada there is a criminal rate of interest which is defined under the Criminal Code. Payday loans are specifically exempted from these provisions.
According to section 347(2) of the Criminal Code:
“criminal rate means an effective annual rate of interest calculated in accordance with generally accepted actuarial practices and principles that exceeds sixty per cent on the credit advanced under an agreement or arrangement”
In accordance with section 347(1) of the Criminal Code,
347 (1) Despite any other Act of Parliament, every one who enters into an agreement or arrangement to receive interest at a criminal rate, or receives a payment or partial payment of interest at a criminal rate, is
(a) guilty of an indictable offence and liable to imprisonment for a term not exceeding five years; or
(b) guilty of an offence punishable on summary conviction and liable to a fine not exceeding $25,000 or to imprisonment for a term not exceeding six months or to both.
It is important to ensure that you understand the rate of interest in any loan or financial agreement. This is particularly true for payday loan businesses, furniture “rent-to-own” type agreements, and other forms of unsecured financing. Although sophisticated financial institutions will not charge criminal rates of interest, payday loans and other unsecured forms of financing can still place people in very difficult, and even insurmountable financial positions in a short period of time.
There is an exemption for payday loans under s. 347.1 of the Criminal Code. In simple terms, this means that payday loan businesses can charge what would otherwise be criminal rates of interest.
“payday loan means an advancement of money in exchange for a post-dated cheque, a pre-authorized debit or a future payment of a similar nature but not for any guarantee, suretyship, overdraft protection or security on property and not through a margin loan, pawnbroking, a line of credit or a credit card.”
S. 347.1 goes on to exempt payday loan businesses, so long as three criteria are satisfied:
- The amount of money advanced is under $1,500 and the term of the agreement is 62 days or less;
- The payday loan business or person is specifically licensed under the laws of a province to carry out business giving payday loans; and
- The province is federally designated by having “legislative measures that protect recipients of payday loans… that provide for limits on the total cost of borrowing under the agreements.“
Of course, what type of regulations protect the recipients of payday loans is up for interpretation. Here in Saskatchewan, one mother is calling for reform as the result of her son using payday lenders to rack up tens of thousands of dollars of debt paying for a cocaine and meth addiction. According to the CBC, his payday loans were at annual interest rates of up to 600% (yes, six hundred percent). Be reminded that the criminal rate of interest otherwise is 60%. There are other horror stories such as this case covered recently on The Current in which a $200 payday loan cost an Ottawa man over $31,000.
So why have we created this legal exemption for payday loans? Well for the historical reasons, you can look back to amendments introduced by the Federal government in 2007. These amendments provide the legal basis for payday loans to charge interest rates in excess of sixty percent.
The article goes on to note that the Saskatchewan government is taking limited steps to rectify the situation by lowering the annual legal interest rate to roughly 450% for payday loans starting February 15th, 2018 according to the CBC. The “cost of borrowing” referred to in these articles refers only to the fee that is charged for borrowing, not the interest. So although the fee on a payday loan can only be a maximum of 17% after the amendments come into effect, the interest rates can still be in the hundreds.
There are a number of organizations working on the issue here in Saskatchewan and across Canada. It is clear that although Saskatchewan has regulations in place (and the Act), they may not be effective in preventing the type of abuses that they are designed to prevent. The Association of Community Organizations for Reform Now (ACORN) has recently criticized the damaging effects of payday loans for people living in poverty.
Is it time for legal reform in Saskatchewan? Although proponents of these businesses say they provide loans to people who wouldn’t otherwise qualify for credit, does it make logical sense to allow businesses to charge what would otherwise be criminal rates of interest to the most impoverished members of Canadian society? Share your thoughts.