The Hill Times: Lowering the interest rate of instalment loans is the right thing to do
Posted February 5, 2024
As a result of being trapped in a high-interest debt loan, people report going without basic necessities, lapsing on other bills, losing retirement savings, skipping important medical visits, and more.
Last year, the federal government launched a consultation to crack down on predatory lending, a commitment it made in Budget 2021. The consultation period was concluded in August 2023, and subsequently we saw draft regulations for changing the criminal interest rate for instalment loans from 48 per cent Annualized Percentage Rate (APR) to 35 per cent APR.
Instalment loans are loans of higher amounts to be paid back in instalments over a period of time. These could range from $2,000 to $10,000 or more. Currently, the Criminal Code of Canada allows lenders to charge 60 per cent Effective Annual Rate interest, which is equivalent to 48 per cent APR. On top of this, lenders can charge insurance, penalties, and other fees.
ACORN Canada, a national community union made up of low- and moderate-income people, through our Fair Banking campaign, has been asking the federal government to lower these exorbitant interest rates for years, as many low- and moderate-income people are forced to rely on fringe lenders such as Money Mart, Easy Financial, and the like to meet financial emergencies in the absence of fair credit alternatives.
But as the federal government finally moves ahead, not everyone is happy.
The Canadian Payday Lenders Association, of which some big banks such as BMO, TD, and RBC are also members, recently started an information campaign alleging that the federal government’s move to reduce the criminal interest rate will cut off many Canadians from accessing credit. They argue a lower interest rate will put lenders out of business, and people will have to switch to more expensive payday loans and loan sharks. They also claim that such loans help people by building their credit score. A letter template was also posted to scare borrowers. But the evidence shows that this campaign is based on myths and misinformation.
First of all, fringe lenders will not only survive, but will continue to make profits even after the criminal interest rate is lowered. There is strong evidence from the United States that even after the criminal rate of interest was lowered—to 32.5 per cent for a two-year $2,000 instalment loan, and to only 25 per cent for a five-year $10,000 instalment loan—lenders continued to thrive across the U.S.
Easy Financial (one of the main instalment lenders in Canada) has been boasting to its investors about its growth in Quebec—the only province that already has a 35 per cent APR on instalment loans. In fact, a Toronto Star article quoted Easy Financial CEO Jason Mullins telling investors that its business was in an excellent position to accommodate a lower overall rate cap.
Second, instalment loans and payday loans are not comparable products. Payday loans are loans less than $1,500, and are to be paid back within 62 days. An FCAC survey shows that most people who take out a payday loan borrow $500 or less.
Moreover, loans provided by fringe lenders are already extremely expensive, and their rates and behaviours are comparable to that of loan sharks. It’s common for many low- and moderate-income people who have taken out instalment loans to experience what feels like harassment by these lenders. As they seek to recoup their money—oftentimes double or triple the original loan after interest and fees, lenders will chase down borrowers at their homes, contact their families, and make incessant phone calls.
Third, these loans rarely ever help people to build their credit because of the exorbitant interest rates.
Findings from a recent ACORN survey are a testament to this. We found that 67 per cent of low- and moderate-income people reported that these loans had an adverse effects on their credit score. One-third of the respondents said their loans were refinanced multiple times—a common tactic that predatory lenders use to ensure people are in the trap of debt forever. Further, 72 per cent of respondents reported the loans—and their efforts to repay them at such high interest rates—caused them to go further into debt.
Lowering the criminal interest rate would reduce harm. As a result of being trapped in a high-interest debt situation, respondents to the ACORN survey reported serious consequences like not being able to buy basic necessities (66 per cent), the inability to pay a different bill (48 per cent), reduced amount of savings for retirement (40 per cent), skipping a needed medical appointment (29 per cent), and incurring overdraft fees (26 per cent). A whopping 80 per cent of respondents reported stress, anxiety, and depression as a result of not making all or most of the high interest loan payments.
Government estimates suggest that lowering the interest rate would save people $26-million dollars. Research from the U.S. shows that lowering the criminal interest rate leads to an increase in affordable loans, benefiting all borrowers.
Banks need to support the government’s move. It’s about time that the criminal interest rate is lowered and the government works on providing fair credit options.
Donna Borden is co-chair of the Toronto East York Chapter of ACORN Canada, a national community union of low- and moderate-income people.
Article by Donna Borden for The Hill Times