Starting January 1, 2025, Canada has implemented significant changes to existing interest rates and lending practices. The goal of these new rules is to protect financially vulnerable Canadians from being exploited by predatory lending practices. Practices such as high-interest or payday loans tend to take advantage of people who are already in precarious financial situations.
This new step by the government is anticipated to relieve some financial stresses on economically disadvantaged Canadians. However, it might also mean that vulnerable Canadians may have fewer loan options available to them. Read on to learn what the possible broader impacts of this decision could be.
Key changes to Canada’s interest rates
- The government has officially lowered the criminal interest rate. It has changed from 48% to 35% APR (annual percentage rate). APR includes the interest charged, plus any other fees or closing costs. The cap is for APR as a whole, not just the interest component.
- They have instituted a federal cap of $14 interest for every $100 borrowed from payday lenders. Payday loan interest rates were previously regulated on a provincial level.
- There are changes to pawn loan regulations as well. Loans under $1000 are exempt from the criminal interest rate, as long as the APR does not exceed 48%. Loans over $1000 are now subject to the new 35% APR limit.
- There are now new caps and regulations on commercial loans as well:
- For loans under $10k: 35% APR
- For loans between $10k to $500k: 48% APR
- For loans above $500k: no cap on interest rates
Impact and possibilities
The “criminal interest rate” is the maximum interest rate that lenders are allowed to charge on a loan. Charging more than this rate would be considered illegal and predatory, and leave a lender open to facing criminal charges.
These changes from the federal government are intended to protect customers from exploitative lending practices. However, fewer people will likely be approved for loans as the new rates may not be sufficient for lenders to accept higher-risk candidates. The lender will lend only when they think they will be able to recoup that investment. When it becomes riskier to provide that loan, they might choose not to do so.
Naturally, this could lead to less people being able to qualify for loans. This loss of access means financially vulnerable Canadians will have even fewer options than they have today. In dire situations, they may end up turning to illegal lenders or pawn shops.
These changes may also have an impact on the lending market as a whole, and reduce overall consumer access to credit. The Canadian government believes that these measures can combat predatory lending.
Broader economic context
The Bank of Canada cut interest rates, with the overnight rate decreasing from 5.00% to 3.25% in 2024. More rate cuts are expected in 2025, and experts predict it may fall to 2.25% by the end of the year. This rate cut seems to have helped boost the real estate space. The housing market seems to be picking up the pace, with home sales expected to increase by 6.6% in 2025.
Unfortunately, so far, these interest rate cuts do not seem to have boosted finances on a personal level for most Canadians, with many still struggling to manage their debt and pay for their basic living expenses. A recent survey showed an alarming point: half of Canadians are only $200 away from insolvency. That means 50% have a safety net of less than 200 dollars. The reduction in interest rates was meant to provide relief for borrowers, but the on-ground reality seems to have panned out differently for people living in financial insecurity. The only sector that seems to have found a boost so far due to rate cuts is real estate.
Canada’s debt-to-income ratio is one of the highest in the Western world, meaning that the amount of debt Canadians are carrying has become unsustainable for a growing portion of the population. This fear is compounded by Canada’s rising unemployment rate, at 6.7% as of December 2024.
The government also plans to introduce an advertising offence under the criminal code. They intend to make it illegal to offer or promote agreements that have an interest rate higher than the criminal rate. Once introduced, it may greatly cut out information and access to predatory lenders, since they would no longer be able to promote their services.
Recommendations for borrowers
- If you’re interested in borrowing, you should first improve your credit score. It’s the easiest way to qualify for better loans with fair rates. You can do this by paying your bills on time. Don’t miss any payments, and keep your credit card balance low – 30% of your limit would be ideal.
- Make a plan on how to pay off your credit card debt in full, instead of carrying it month to month and paying extra interest. There are many methods you can look into, like the snowball method or debt avalanche method. To do this, you will have to:
- Stick to a budget. Make a budget and see where your money is going. You may find that you can reprioritize some of the things in your budget. This can help you slowly but surely start getting out of debt. Every penny counts, especially when interest rates are unforgiving.
- If you think your current budget and income are not serving your financial goals, seek financial advice.
Key takeaways
From January 1, 2025, the Canadian government has officially reduced the criminal interest rate to 35% APR. They have also specified a federal cap of $14 interest for every $100 borrowed from payday lenders.
The government took these measures to combat predatory lending. The real-world effect is that fewer people are likely to be approved for loans, meaning vulnerable higher-risk candidates may find higher rates of rejection. This may leave them in more dire situations.
A recent study found an alarming statistic: half of Canadians are only $200 away from insolvency. Reducing reliance on debt is increasingly important, as Canada’s debt-to-income ratio is now one of the highest in the Western world. If you’re currently dealing with debt, you can contact one of our trained credit counsellors for advice – they can help you figure out which debt solution could be the right fit for your specific situation.
