The 2021 budget sets up a fight against high interest loans

Although it only counted a few lines in the hundreds of pages that made up the 2021 budget, the federal government’s commitment to open talks on changing Canada’s “criminal interest rate” has pushed anti-activists. -poverty to prepare for a battle with high interest lenders.

It is currently a federal crime to charge interest at an annual rate of 60 percent on any type of installment loan or line of credit.

But Canadian laws have left one type of loan exempt from this ban. Short-term payday loans, which are typically due within two weeks, are regulated by the provinces and typically charge annualized interest rates in the range of 400-500%.

While payday loans charge the highest interest rates, those who want industry reform are also alarmed by a new trend: payday lenders are offering longer-term loans or lines of credit.

Companies like Money Mart and Cash Money began to engage in these types of loans after 2016, as provinces began to tighten the rules on what they could charge for payday loans.

Compared to bank rates, the interest charged on these loans is Very high, often in the range of 45 to 50 percent.

The “criminal” interest rate

These longer-term loans must meet the 60 percent annual interest limit, but critics like Independent Senator Pierrette Ringuette say the limit is still far too high.

“This criminal 60% interest rate that was put in place over 40 years ago is no longer what is demanded in the Canadian market,” she told CBC News as she spoke. was preparing to introduce a bill that would set the criminal interest rate at 20%. % above the Bank of Canada overnight rate.

“We are at a time when the Bank of Canada rate is 0.5%. So I honestly believe that 20% above the Bank of Canada’s overnight rate is adequate criminal interest rate for many years to come.

“This will be in place and can be in place for a very long time, and create the stability that we need in this new modern era … We are no longer in the 1980s, [when] the Bank of Canada’s overnight rate was 22%, 23% or even 24%.

Senator Pierrette Ringuette, here speaking with CBC Marketplace. says she wants to see “abusive” lending practices end and interest rates capped at 20%. (SRC)

But the industry lobby group says “a reduction of such a rate would wipe out the industry and result in millions of Canadians denying access to credit from approved legal lenders.”

The Consumers’ Financial Association of Canada (CCFA) – which represents Canada’s largest payday lenders, operating around 900 retail outlets – said in a written statement that “with the cut, it would not be financially viable to lend to a majority of borrowers who seek credit from our members “.

The lending industry has said it plans to argue that the alternative to payday lenders will be criminal loan sharks.

“If the government unwittingly removes access to credit, the need will not go away and borrowers will turn to unlicensed sources elsewhere,” says the CCFA.

The Financial Consumer Agency of Canada has warned of the dangers of falling into the debt trap by borrowing at high interest rates. This agency infographic explains the different costs of four methods of borrowing $ 300 for 14 days. (Financial Consumer Agency)

The CCFA has increasingly made this argument in recent years as provinces and even cities have imposed restrictions on their operations – and after the federal government launched a public information campaign warn Canadians of the risks associated with the use of services that Financial Consumer Agency of Canada, “are very expensive compared to other means of borrowing money.”

Bills target industry

The industry has long been in the crosshairs of anti-poverty groups such as GLANS, but is now increasingly targeted by legislation.

NDP MP Peter Julian has campaigned for years for tighter regulation of the high interest lending industry and currently has a private member’s bill on the subject.

“I’ll just give you one example of many … A local voter who borrowed $ 700 a few years ago paid $ 13,000 in interest charges and still owes $ 700,” he said. he told CBC News.

“We’re talking about real interest rates of 400, 500, up to 600 percent a year. It’s a loan shark legalized and at a time when Canadians are in trouble, it just shouldn’t be. authorized.”

Julian said the rules that allow the system to charge these rates were “put in place deliberately” and he doubts the sincerity of the government’s recent commitment to consult.

“The government’s attempt to do it justice in the budget by saying, ‘Well, we’re going to consult on this’ makes no sense to all Canadians who are fighting this impossible debt burden,” he said. -he declares.

Although the Government of Canada provides information warning Canadians against borrowing at high interest rates, it has not acted to lower the rates that lenders may charge. (Government of Canada)

Like Ringette’s bill, Julian’s C-247 proposes to tie the criminal interest rate to the Bank of Canada’s overnight rate, but with a little more leeway for lenders – under the Julian’s bill, they could exceed that 30% rate.

Katherine Cuplinskas of Finance Canada says the government is committed to fixing the problem.

“Over the past 15 months, we have implemented significant and expanded new income support programs. These include the PKU, the Recovery Benefit and the Expanded Employment Insurance (EI) program, ”she said.

“However, many low-income and modest-income Canadians continue to resort to short-term, high-interest loans to make ends meet, leaving them in a cycle of debt. That is why we are committing in the budget to tackling predatory lending. We will soon be launching a consultation on lowering the criminal interest rate in the Criminal Code of Canada on installment loans offered by payday lenders. “

Cuplinskas told CBC News the government is not yet ready to provide details on how and when the consultation will take place.

The pandemic effect

While the pandemic may have drawn more attention to the issue of high interest loans, it is unclear exactly what effect it has actually had on lenders and borrowers.

Julian and Ringuette said they heard of people being forced to resort to such loans to get through a difficult year of job losses and reduced hours. The lending industry, meanwhile, said it saw demand for its services decline during the pandemic.

Lenders argue that if they are unable to provide high interest rate loans, things will only get worse for poorer Canadians.

“It is important for lenders to extend credit to Canadians who are denied loans from a bank or credit union,” said CCFA. “These loans are high risk and expensive to provide. It is important that policymakers fully understand the need for licensed legal credit options and the costs of providing that credit.”

“Two-class system”

Julian agrees that high interest lenders exist because there are often no other options available for people who do not have strong credit scores or collateral.

“The reality is that what we have created in this country is a two-class system, where those with assets can access loans, short or long term, at a reasonable cost,” he said. declared. “And then those who have the fewest assets to offer are the ones who are most defrauded by a system that does not protect them.”

In Australia – where there is evidence that the pandemic has pushed many people, especially young people, into debt – the government warns against such loans but at hot and cold soufflé on the idea of ​​taking legislative action.

The UK recently considered putting in place tighter controls on interest rates, but backed down on fears of shutting down access to credit for the poorest people and encouraging criminal loan sharks.

In contrast, several American states have limited amount lenders can charge payday loans and many states have imposed a 36% cap on interest on installment loans. The federal government also prohibits lenders from charging interest rates above 36% to members of the US military (some lenders were known to set up near military bases).

Canada’s CCFA has said these restrictions have effectively killed the payday lending industry in some states and warns that the same could happen here, leaving many low-income households with no other source of credit.

Peter Julian said the government should ignore these arguments and – rather than launching a lengthy consultation – should simply incorporate his bill, C-274, into the budget.

“Mr. Trudeau has the opportunity. The bill is there. “

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