It’s not unusual for people to have multiple loans at any given time. (Shutterstock/dcwcreations)
For years, Canadians in need of cash—often those with lower incomes—have been falling victim to the exorbitant interest rates and fees charged by alternative lenders. That’s why the 2023 federal budget proposed changes to the Criminal Code that would limit the amount these lenders could charge in interest and fees. Among other changes, the proposals would lower the maximum annual interest rate that lenders can charge to 35 per cent from the current ceiling of 60 per cent. They would also cap the maximum fee that lenders can charge people for the amount they borrow to $14 per $100 borrowed (current fees vary across the country and can reach up to $20).
We spoke with Doretta Thompson, CPA Canada’s financial literacy leader, about why this proposal is significant and what it means for Canadians.
CPA CANADA: Why is predatory lending so dangerous?
DORETTA THOMPSON (DT): Payday loans and high interest instalment loans are extremely expensive. The biggest problem is that they can trap the most financially vulnerable people in a vicious cycle of borrowing. Consider someone who takes out a single small payday loan to deal with an emergency expense, and finds themselves unable to pay it back within the usual two-week period. This can trigger significant penalties, and lead to extending the loan, or securing an additional loan from another payday loan company. It’s not unusual for people to have multiple loans at any given time. And if they do manage to pay back the loan, they will find themselves the constant recipients of offers to continue borrowing. That’s how it spirals out of control. What starts as a single small loan can eventually cost them everything.
Payday loans are not subject to the 35% annual interest limit. They are provincially regulated, and the budget has reduced those fees to $14 for every $100 borrowed. That is the fee over a two-week period. Annually, that can add up to up to 600 per cent of the original loan amount.
CPA CANADA: The past three years have been particularly difficult for Canadians who were already having trouble making ends meet. Have they been resorting more frequently to predatory-type loans?
DT: According to ACORN (Association of Community Organizations for Reform Now), there was a 300 per cent jump in instalment loans between 2016 and 2020, and many Canadians’ financial situations have become even more precarious over the past three years. And since there are no other alternatives for people with strained resources or poor credit, they’re forced to turn to these alternative lenders. People with assets can leverage things differently.
CPA CANADA: Are there currently better options for lower-income Canadians outside of these alternative lenders?
DT: These lenders are for the most part lenders of last resort. The vast majority of people turning to alternative lenders—and they are not all lower income Canadians—do so because they have no other options. They either don’t qualify for loans from mainstream institutions, or they have exhausted their available credit. That’s why the problem is so difficult. It’s good that the government is shining a light on predatory lending—but the key will be finding ways to extend alternative sources of small loans and credit to the most vulnerable Canadians. It’s expensive to be poor.
In 2021, Canada Post and The Toronto-Dominion Bank were considering launching a new personal loan product in select post office locations and then expanding availability across Canada, particularly for those in rural, remote and Indigenous communities. This project is currently on indefinite hold and I’d love to see it come back to life. Similar programs are used successfully in countries such as England and France, where you can access some basic services in a non-threatening way without turning to alternative lenders.
CPA CANADA: What advice do you have for lower-income Canadians to avoid the need for alternative lenders?
DT: One of the first things we suggest is that people access all the benefits to which they are entitled. There are significant income support program, such as GST rebates, that are delivered through the income tax system. Hundreds of millions of dollars go unclaimed because many low-income individuals who would be eligible for these programs don’t file their income tax returns. There are free tax clinics across the country offered by the Community Volunteer Income Tax Program (CVITP) and supported by CPAs that help people on low incomes to fill out forms and understand the process better.
Second, we suggest that people educate themselves on basic banking terminology and processes so that they have the confidence when they are trying to access more mainstream sources of credit and are able to protect themselves from exploitation. We know, for example, that financial institutions oversell to vulnerable people, such as newcomers to Canada and Indigenous people. CPA Canada’s financial literacy sessions are geared toward empowering people in that area.
We also suggest setting up a small emergency fund. It’s not realistic to expect low-income Canadians to set aside sufficient funds for three or six months’ basic expenses, but the average payday loan is about $400. So, if you can save up that amount, even if it takes some time, it can help save you from that first step that leads to spiralling out of control.
The harsh reality is that for many people caught in the predatory loan cycle, filing for consumer protection may be their only option. Initial meetings with licenced insolvency trustees are free. There are also not-for-profit credit counselling services available through Credit Counselling Canada.
CPA CANADA: According to ACORN, almost one in two Canadians are now living paycheque to paycheque. How can people get out of that situation?
DT: It’s precisely because of these statistics that we offer free financial literacy programs. We want to help people understand their financial options, fully understand what their resources are, what their wants and needs are, and then prioritize their spending and saving goals. It’s not just people in the lower quintile who are living this way. Those who are considered higher-income earners can be in the same situation.
It’s very important to ask for help earlier rather than later. People struggling with debt take an average of about five years to reach out for help, and that struggle impacts every aspect of their lives.
CPA CANADA: Do you think the new federal budget proposals on capping rates will help solve the alternative lending problem?
DT: We’re pleased that the federal government has shone a light on this problem and taken the first step by dropping the interest rate to 35 per cent and fees to $14 per $100 borrowed. We are also pleased that they plan also to begin a consultation process. There is a lot more work to be done on a systemic level, and we sincerely hope the federal, provincial and territorial governments can work together to further improve the situation.
LEARN MORE ABOUT DEBT AND LENDING
Find out more about alternative lending and how to stay out of debt and avoid bankruptcy. Check out CPA Canada’s financial literacy resources, and read about CPA Canada’s tax highlights from the federal budget.