What consumers need to know about the new rules for alternative lending

Advocates are hoping the changes will help some borrowers who are trapped in a cycle of debt. Pat Foran reports for Consumer Alert.

New changes to high interest and payday loans in Canada came into effect on Jan. 1 in a move to crack down on “predatory lending” practices.

The regulations come after first being introduced by the federal government in 2023, as an update to the ‘Criminal Interest Rate Regulations.’

After concerns of predatory lenders taking advantage of vulnerable people in lower income communities, the federal government announced two major changes: setting limits on payday loan charges and capping interest rates that can be charged on loans.

These changes are to help borrowers but according to the payday loan industry, it means some customers may no longer qualify for high-interest loans.

According to Doug Hoyes of Hoyes, Michalos and Associates, a licenced insolvency trustee, the new federal cap of payday loan fees are set to $14 per $100 borrowed.

This would help some consumers, but Hoyes says that payday loans are still a very expensive way to borrow money.

“You’re paying $14 and you pay it back in two weeks. That means if you get a loan every two weeks for a year, that’s 364 per cent interest you’re paying,” said Hoyes.

Other changes involve high interest loans.

The criminal rate of interest that could be charged before Jan. 1 was 47.9 per cent. Now, it’s capped at 35 per cent interest. So, if you have poor credit, the most you can be charged for a loan is 35 per cent interest.

“For customers who can be approved it can be helpful, but the challenge is it disenfranchises most needy segments of the population so they can no longer lend to these people,” Peter Kalen, CEO of Money Mart told CTV News Toronto.

Money Mart has 365 locations across Canada and offers payday loans and unsecured personal loans. The company says it’s already turning some customers away who are unable to qualify under the new regulations.

“Whereas someone would have got a $5,000 or $10,000 loan before, now they are getting declined outright and they are getting pushed to illegal lenders,” said Kalen.

Credit counseling services agree some clients who may not qualify for a high interest loan will turn to more expensive options to borrow money.

“That consumer is now forced to go to a payday loan company or a pawn shop or somewhere in the black market,” said Bruce Sellery, CEO of Credit Canada Debt Solutions.

Kalen told CTV News the federal government should crack down on illegal lenders.

Advocates in favour of the changes say the cap on rates could help some borrowers who have been trapped in a cycle of debt. If they can improve their credit rating, they may qualify for lower interest loans and save money.

It’s also a reminder for everyone to always try and pay your bills on time to keep your credit rating in good standing. Once you have a low credit score it can be more difficult to be approved for a car loan, mortgage or credit card.