Ottawa decided to make the first change in 44 years in the 2023 budget
The Canadian government’s decision to cut the cap on interest rates paid by consumers to lenders from 47% to 35% will have unintended consequences according to a new report.
Ernst & Young’s analysis calculates that the move, announced in the 2023 budget, will mean 2 million Canadians will lose access to loans from regulated lenders and force them to pay more through payday loan firms and illegal lenders, an estimated $4.4 billion in additional interest payments.
It also says there will be a negative impact on the Canadian economy with the loss of 50,000 jobs and $10.7 billion.
"It is clear, that the proposed changes to the maximum allowable rate of interest will only exacerbate the existing affordability challenges,” said CLA president and CEO Gary Schwartz. “We're looking at billions of dollars of lost GDP and thousands of lost jobs, which is highly concerning. Unfortunately, this is another example of the Federal Government abandoning evidence-based decision making. We continue to request that the Minister of Finance meet with stakeholders to collaborate on a better solution that will truly support the financial health of Canadians."
The report was commissioned by the Canadian Lenders Association which has previously warned that Ottawa’s decision could increase criminal activity.
950% APR
In a report in conjunction with the Ontario Association of Chiefs of Police, the CLA highlighted how similar interest rate capping in California led to a collapse of state-regulated installment loans with consumers turning to unregulated alternatives with interest rates as high as 950%.
In Quebec, the report’s analysis found that some consumers were circumnavigating rate cap restrictions that limited their borrowing options by using internationally based micro-lenders at high rates.
“The report’s finding that this change might contribute to an upsurge in criminal activities and disproportionately impact already at-risk Canadians is yet another clear demonstration the government has failed to think this through,” said Schwartz in February.
