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Momentum calls to end ‘criminal’ interest rate for payday loans

In a new policy report released this month, a Calgary non-profit is calling for an end to what they claim are “criminal” payday loan interest rates.

Momentum is also calling for an end to legislative exemptions that allow for interest rates as high as 500 per cent nationally, and 400 per cent in Alberta.

The group is asking for the maximum effective annual rate of interest in Canada to be set to 36 per cent, including lending costs.

“Going from a 400 per cent interest rate to 36 per cent interest rate is huge when you’re counting your dollars just to be able to afford rent, or buy diapers, or food for your family,” said Courtney Mo, manager of public policy research and evaluation for Momentum.

Loans target low income, new Canadians

Momentum, which works with low-income Calgarians to improve financial skills, said that payday or installment loans unfairly target the vulnerable.

“Those who can least afford to borrow have to pay the most,” said Mo.

Currently in Canada, the criminal code limits the rate of interest to 60 per cent, but provides an exemption for payday lenders. Section 347.1 of the criminal code allows for loans under $1,500, and where the payment period is under 62 days to exceed the 60 per cent limit.

Mo said that on installment loan contracts, lenders often charge right up to the limit at 59.9 per cent.

“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 lenders licensed by the city, 17 were located in regions where the median income for families was between $56,192 and $79,053—the lowest quartile from the 2016 Census.

The same analysis found that 15—or 52 per cent—of those lenders were located in areas with the lowest income single parent families.

“We have seen a proliferation of payday lenders, and fringe lenders in lower-income corridors,” said Mo.

Statistics from 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 loan value issued by the industry to consumers.

Of the 288,401 loans issued in the province, 42,678 were defaulted on. Correspondingly, this represented $19.2 million or approximately 8% of the total loan value issued in Alberta.

A little over $23 million in cost of credit fees were charged to consumers.

Proposed changes by Momentum

The non-profit has proposed four changes to the criminal code, and to municipal and provincial regulations.

In addition to lowering the EAR interest rate to 36 per cent, they are asking for a repeal of section 347.1 of the criminal code.

Mo said this would bring Canada in line with regulations in Quebec, and in many U.S. states.

They are also asking for the removal of actuarial certificates and approval by Canada's Attorney General for the prosecution of criminal rate of interest investigations.

Momentum is also calling on greater access to safe, small dollar credit.

"All of us need to borrow at some point in our lives—and debt can actually be productive if you're borrowing for education, borrowing for tools for work, or to start a business, etc.—and so we think that access to safe and affordable credit is fundamental for all Canadians,' said Mo.

The non-profit has advocated for greater use of small loans from credit unions, or through proposed postal banking via Canada Post.

Payday industry says they play an important role for Canadians

In an emailed statement, the Canadian Consumer Finance Association, which represents payday lenders in Canada, said that their members are highly regulated and licensed.

"Payday loans are highly regulated and fees charged are set by provincial governments based on their analysis of the cost to offer the product," said the statement.

They said that they offer payday lending services because "many hard-working Canadians are unable to access either short term or long term credit from banks, credit unions and trust companies."

In a response to a question asked about Momentum's call to reduce interest rates by LiveWire Calgary, the association said that this would only deny credit to Canadians.

"Of course, everyone would like a cheaper loan, but governments should not further restrict interest rates that 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," said the statement.

"The demand for credit however would not change and would simply shift to illegal online unlicensed lenders such as the lenders identified by Service Alberta."

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 clustering of pawnshops and payday lenders. At that time, only then Ward 3 Councillor Jim Stevenson voted against the bylaw.

The bylaw prevents any payday loan vendor from being within 400 feet of one another.

The Province of Alberta currently limits the interest rate for payday loans to 400 per cent, and requires the term of the loans to be between 42 and 62 days in length. Alberta also limits fees to $15 for every $100 of the loan, resulting in a maximum of $225 in fees for a payday loan.

The legislature passed An Act to End Predatory Lending in 2016, which reduced previous rates of costs for borrowing.

Peter Julian, MP for New Westminister-Burnaby, has brought forward several private members bills to amend section 347.1. Bill C-274 received a first reading in March of 2021 prior to the Federal election. His new bill, C-213, was introduced and received a first reading in parliament on December 14.

"As members are well aware, legalized interest rates of up to 600% currently exist in Canada. This bill would end the loopholes that allow financial institutions and payday loan lenders to charge 500% or 600% and would cut in half the criminal interest rate that is currently permitted in the Criminal Code," said Julian to parliament.