When High Interest Rates Become Illegal
SAINT JOHN — The cost of living is continuing to rise, with inflation and interest rates bringing unanticipated new expenses to New Brunswickers.
As banks tighten their lending criteria, many are looking to alternative financing options to help stretch their paycheques and make ends meet. But insolvency experts warn that it’s worth reading the fine print before signing on the dotted line to get that extra cash, as fees and interest rates can be significantly higher than at traditional banks or credit unions.
Not long ago, the federal government lowered Canada’s “criminal interest rate” in its budget bill C-47, which became law on June 22.
The bill replaces the current definition of criminal interest rate with making it illegal in most cases for lenders to charge more than 35 per cent interest on credit advances. The definition applies to both consumer and commercial lenders.
The bill, however, lays considerable power at the feet of the Governor in Council, giving them the authority to provide certain exemptions.
“Predatory lenders can take advantage of the most vulnerable people in our communities, including low-income Canadians, newcomers, and seniors — often by extending very high interest rate loans,” Department of Finance officials told Huddle in an email exchange. “That is why the federal government has changed the Criminal Code to lower the criminal rate of interest to 35 per cent APR. The Department of Finance is also engaging with Canadian businesses, consumer groups, and provincial and territorial regulators to better understand how it can best protect Canadians, including Maritimers, from predatory lending practices.”
In her speech to the Senate considering then bill C-47, New Brunswick Senator Pierrette Ringuette said that while she was pleased with the government’s actions to lower the threshold for an interest rate to be considered criminal, more should be done.
“Based on what I heard from many Canadians, and what I’ve learned from my own research over the years, instalment loans are being granted at unreasonable, even abusive, rates that can be as high as 39 per cent, 45 per cent and even 59.9 per cent, just within the 60 per cent limit. I have seen public services charge late fees of 42 per cent,” she said in the June 20 speech.
“Consumer debt is a serious and growing problem in Canada. This problem is of particular concern with respect to inflation and the rising cost of living. According to TransUnion, consumer debt from all sources has increased by 5.6 per cent year-over-year to a new high of $2.32 trillion. That’s the debt load that Canadians have,” she continued.
“Instalment loans are down 5.76 per cent but Canadians still hold an average of $20,846 in debt — and these are often at the highest rates of interest. It is worrying that debt continues to climb and measures like this — to help Canadians deal with their debt load — will not do a lot to improve or perhaps reverse this trend.”
Ringuette put forward her own bill, S-239, An Act to amend the Criminal Code (criminal interest rate), which is at second reading in the Senate. She said she didn’t want to withdraw it because the new government measures don’t go far enough to protect Canadians from predatory interest rates.
“Whereas Bill C-47 sets the limit at 35 per cent, my bill would tie the criminal interest rate to the Bank of Canada’s overnight rate plus 20 per cent,” she said.
Ringuette’s concerns are echoed by Robert Powell, a licensed insolvency trustee with Powell Associates Ltd. He says the interest rates on loans some of his clients have needed help with have been well in excess of 20 per cent, some of them in the 30-to-40 per cent range.
“That’s just the rate,” he says, noting all the other fees, penalties and other hidden costs that can be associated with these kinds of loans. “Then they’re selling you insurance products…insurance for your loan in case you become unemployed.”
He says there’s also late fee charges which can be an additional $25 or 5 percent of the payment, whichever is less. Plus NSF charges from banks when payments are automatically withdrawn but there’s not enough cash to cover it.
“So these loans can be very, very expensive.”
Powell says that people have become so fixated on affordable monthly payments and maintaining their credit scores, that they have lost sight of how much they are ultimately actually paying for loans, and how long they will be in debt for.
He says that leads to people getting themselves into bad situations where they feel like they don’t have many options.
“If someone has a bunch of credit card debt, or lines of credit or they lost their job, and there were no predatory lenders, cash stores or 39 percent interest guys, then they would have to deal with their problem then,” he says. “What [high-interest lending] does is allow them to push it out…. All they’re doing is extending, extending.”
He says when people need money in order to keep an asset, they tend to underestimate how big a payment they can truly afford, and to overlook the terms of the loans.
“It’s a desperation because [people think]: I absolutely have to get the money today because I can’t lose this asset” he says.
Powell says people will rationalize how a high-interest loan is a short-term solution to a temporary problem.
“It costs 40 per cent, I get that, I’ll work my way through this. I’m going to get a better job, I’m going to do something,” he says. “But then that thing doesn’t happen. They get stuck.”
“The availability of these debt products to a large extent just allows people to defer dealing with the true issue today.”
Powell says just prior to Covid there were about 4400 insolvencies in the province over the year, but that the pandemic and all the financial supports offered pushed that number down to just under 3,000 as of May 31, 2022. The latest statistics starting from June 2022 until now have seen insolvencies in the province rising again to nearly 3,300.
He says equity from rising house prices has helped people access money to help keep those insolvency numbers lower.
For people who are feeling the pinch, Powell says that there’s traditionally no charge for an initial consultation with a licensed insolvency trustee, and that the advice could be invaluable. The Financial Consumer Agency of Canada also has information for people with questions about predatory lending or other financial questions.
His biggest piece of advice to anyone thinking of getting this kind of a product is to take your time.
“Do not sign the papers right away,” he says. “Say: I have to go think about this. I have to go talk to someone. There’s no deal that can’t be done tomorrow.”
Alex Graham is a Huddle reporter in Saint John. Send her your feedback and story ideas: [email protected].