Canada updated its criminal interest rate. This expert worries about ‘unintended consequences’

People pass a payday loan store in Oshawa Ont., on May 13, 2017. (Doug Ives / The Canadian Press)

Canada’s new criminal interest rate is meant to protect consumers, but a credit counselling group fears it may do the opposite.

The federal government lowered the criminal interest rate, or the most that lenders can charge people who don’t qualify for traditional loans, to 35 per cent from 48 per cent. It came into effect on Jan. 1.

The government said the change aims to combat predatory lenders and protect Canadians from very-high-interest-rate loans.

Gary Schwartz, president of the Canadian Lenders Association (CLA), says not all alternative lenders are predatory. The problematic ones who exploit vulnerable people tend to be illegal lenders and payday lenders, who charge up to 300 per cent interest rates and are not CLA members.

The criminal interest rate applies to all loans, except for certain payday loans and tax rebate advances, according to the government.

But Bruce Sellery, CEO of Credit Canada, a non-profit credit counselling agency, says the change could drive borrowers with lower credit scores or no credit history to illegal or unregulated lenders.

“Every time you enact price controls, there are unintended consequences,” Sellery said in an interview with CTVNews.ca. Sellery said many subprime lenders his organization has spoken with are planning to reduce the number of loans with fewer people qualifying as a result of the lower interest rate, since they’re not making as much money.

“This change will reduce the burden of interest marginally, but it’s not significant,” he said. “In some cases, our real concern is that they will go on to the black market. They will borrow illegally for ridiculously high rates in an environment that’s not regulated.”

Sellery adds that the measure fails to address the root causes of debt, such as a lack of housing affordability, a living wage as well as problems with mental health, family and physical health. He shared his advice for borrowers who may be shut out of loans as a result of the lower criminal interest rate.

Write it down

Sellery says to record the amount of debt you have in one place, such as a spreadsheet, including the interest rate, minimum payment and due date.

Make minimum payments

“The first step is that you have to pay those minimums on time, every single time, no matter what,” Sellery said. “Otherwise, your credit score is going to be further impaired.”

Create a plan

Once you have a snapshot of the situation, Sellery recommends you find ways to increase your income and reduce expenses. You can contact a non-profit credit counsellor who offers free, “non-judgmental,” and confidential services and resources, Sellery said.

“There’s always options,” he said. He gave examples like refinancing your mortgage and paying all debts together with a reduced rate through a consumer proposal or debt consolidation program.

Learn how to budget

Learning basic budgeting skills through apps or free webinars can be helpful, Sellery added.

You can apply either the “debt avalanche” or “debt snowball” strategy once you’ve developed a plan to tackle debt, he said.

With the “debt avalanche” strategy, Sellery says people will pay down the highest rate debt first to save the most money over time. With the “snowball” approach, people pay down the lowest balance first, which will give them the confidence that comes with progress.

Get your credit score

Many places allow you to sign up to get your credit score for free, such as banks and credit bureaus, Sellery said. Learning the weakest variable in your credit score can help you work on improving it so you can increase your credit score over time, possibly allowing you to borrow from a traditional bank that typically offers lower rates.

Get professional advice

For those in desperate situations, Sellery recommends contacting credit counsellors for free advice.

“We can give them perspective to see whether or not there are ways to ask for a higher credit limit somewhere, ask for a lower rate somewhere else, or if it’s time for them to do a more formal program like a debt consolidation program,” he said. “What we really want to do is give people an opportunity to reset their circumstances.”