In a new policy report released this month, a Calgary nonprofit is calling for an end to what it claims are “criminal” interest rates on payday loans.
Momentum is also calling for an end to legislative exemptions that allow interest rates of up to 500% nationwide, and 400% in Alberta.
The group calls for the maximum effective annual interest rate in Canada to be set at 36%, including borrowing costs.
“Going from a 400% interest rate to 36% is huge when you’re counting your dollars just so you can pay rent, buy diapers or food for your family,” said Courtney Mo, director of public service. policy research and evaluation for Momentum.
Loans target low-income new Canadians
Momentum, which works with low-income Calgarians to improve their financial skills, said payday or installment loans unfairly target vulnerable people.
“Those who can least afford to borrow have to pay the most,” Mo said.
Currently in Canada, the the penal code limits the interest rate to 60%, but provides an exemption for payday lenders. Section 347.1 of the Criminal Code allows loans under $1,500 with a payment term of less than 62 days to exceed the 60% limit.
Mo said that on installment loan contracts, lenders often charge up to the 59.9% limit.
“Far too high, especially for low-income families, newcomers to Canada and vulnerable people,” she said.
A LiveWire Calgary analysis of payday lenders in Calgary found that of 29 city-licensed lenders, 17 were located in areas with median family incomes between $56,192 and $79,053, the lowest quartile in the 2016 census.
The same analysis found that 15 – or 52% – of these lenders were located in areas where single-parent families had the lowest incomes.
“We’ve seen a proliferation of payday lenders and fringe lenders in low-income corridors,” Mo said.
Statistics of the Government of Alberta indicate that 33% of all payday loans issued in 2020 were between $1,000 and $1,500. This represented $124.3 million of the $219.5 million in total value of industry loans to consumers.
Of the 288,401 loans issued in the province, 42,678 have not been repaid. As a result, this represented $19.2 million or approximately 8% of the total value of loans originated in Alberta.
Just over $23 million in credit charges were passed on to consumers.
Momentum Proposed Changes
The non-profit organization proposed four amendments to the criminal code and to municipal and provincial regulations.
In addition to lowering the EAR interest rate to 36%, they are asking for the repeal of section 347.1 of the Criminal Code.
Mo said this would bring Canada in line with regulations in Quebec and many US states.
They are also asking for the removal of actuarial certificates and the approval of the Attorney General of Canada to pursue criminal investigations into interest rates.
Momentum also calls for greater access to safe, low-value credit.
“We all need to borrow at some point in our lives – and debt can actually be productive if you’re borrowing for education, for work tools, or to start a business, etc. – and we think so access to safe and affordable credit is fundamental for all Canadians,” said Mo.
The nonprofit has advocated for greater use of small loans from credit unions or through postal banking services offered through Canada Post.
Payday industry says it plays an important role for Canadians
In an emailed statement, the Canadian Consumer Finance Association, which represents payday lenders in Canada, said its members are highly regulated and licensed.
“Payday loans are highly regulated and the fees charged are set by provincial governments based on their analysis of the cost of offering the product,” the statement said.
They said they offer payday loan services because “many working Canadians are unable to access short-term or long-term credit from banks, credit unions and trust companies.”
In response to a question posed about Momentum’s call for interest rate cuts by LiveWire Calgary, the association said it would only deny credit to Canadians.
“Of course, everyone would like a cheaper loan, but governments should not further restrict the interest rates a lender can charge. If they did, the only result would be that a larger cohort of Canadians would be denied access to credit, or at least credit. from a government-regulated lender,” the statement said.
“Demand for credit, however, would not change and would simply shift to illegal, unlicensed online lenders, such as Service Alberta Identified Lenders.”
The province of Alberta has issued warnings about unregulated online lenders targeting Albertans.
Current and Proposed Industry Regulation
In 2015, the City of Calgary passed a bylaw preventing the consolidation of pawnbrokers and payday lenders. It was only then that Ward 3 Councilor Jim Stevenson voted against the settlement.
The regulations prohibit any payday loan seller from being within 400 feet of each other.
The province of Alberta currently limits the interest rate for payday loans to 400%, and rrequires loan terms to be between 42 and 62 days. Alberta also limits fees to $15 for every $100 of the loan, giving a maximum fee of $225 for a payday loan.
The Legislature passed legislation to end predatory lending in 2016, which reduced previous cost of borrowing rates.
Peter Julian, MP for New Westminster-Burnaby, introduced several private member’s bills to amend section 347.1. Bill C-274 received first reading in March 2021 ahead of the federal election. His new invoice, C-213was introduced and received a first reading in parliament on 14 December.
“As members are well aware, legal interest rates of up to 600% currently exist in Canada. This bill would close loopholes that allow financial institutions and payday lenders to charge 500% or 600% and cut the criminal interest rate in half. which is currently permitted by the Penal Code,” Julian told parliament.