What Are The Maximum Interest Rates I Can Be Charged In Ontario?

The current interest rate climate might be hard to navigate if you’re a borrower or considering borrowing money. In Canada, interest rates were historically low and very stable for years. Suddenly, they have been going up at an alarming pace.

Before you borrow money, you’ll want to make sure lenders are not taking advantage of you. Understanding how the Bank of Canada sets interest rates, the maximum interest rates in Ontario, and who is exempt from maximum rates will help you borrow wisely.

Legal Interest Rates

Lenders charge interest rates to cover their costs, compensate for their risks, and make a profit. They must follow the law and not charge more than the maximum interest allowed.

The Bank of Canada is the starting point for interest rates. They set the prime rate, which is the rate that lending institutions charge as an overnight borrowing rate. The Bank of Canada will often increase rates to cool inflation. The prime rate has increased multiple times since March 2022 in an effort to slow inflation in Canada.

On the other hand, when the economy is slow or in a recession, the Bank of Canada typically lowers the prime rate. This is because reducing the prime rate will lower interest rates which, in turn, will cause people to borrow and spend.

Financial institutions, like banks and credit unions, will increase or decrease their rates for loans, mortgages, and lines of credit rate based on the Bank of Canada’s prime rate. However, alternative lenders and payday loan companies don’t adjust their rates when the prime rate changes.

Lenders that offer high-interest loans currently cannot charge more than 60% interest. On the other hand, payday lenders are subject to the maximum rates set by the province they operate in. Rates for payday loans can be as high as 548%.  The federal government intends to change these rates and has included new maximum rates in the federal budget for 2023.

The history of maximum interest rates in Canada

In 1980, when the prime rate was 21%, the federal government brought in legislation to set a maximum interest rate that lenders could charge borrowers. The purpose was not to make maximum interest rates part of financial consumer protection laws. Instead, the government wanted to curb predatory lending practices.

An interest rate exceeding 60% interest that is charged or received by a lender is considered a criminal rate of interest. The Criminal Code of Canada addresses criminal rates of interest in Section 347. Due to federal budget changes in 2023, the government plans to amend the criminal rate of interest to rates exceeding 35%.

Predatory lending involves preying on financially vulnerable people. These borrowers can’t get credit from traditional institutions but need a loan, so they turn to alternative lenders. Unfortunately, these lenders charge high-interest rates to compensate themselves for the risk they’re taking. Maximum interest rates are in place to stop loan-sharking and other borrowing practices that intimidate or threaten borrowers.

High-cost lending

High-cost lenders offer short-term and long-term loans as well as payday loans. Some offer car title loans, home equity loans, and lines of credit. These companies cannot charge more than 60% interest on a loan. Except for payday loans, charging more than 60% interest is a criminal interest rate detailed in the Criminal Code of Canada and will be changing to 35%. The maximum interest rate applies to the following:

• Credit cards
• Loans
• Loans for vehicles
• Lines of credit
• Car title loans
• Installment loans and other credit products

The maximum interest rate doesn’t apply to all the costs you might incur while borrowing. It refers to the interest rate of the loan and charges like commissions, fees, penalties, or fines. Expenses you might have in addition to the maximum 60% interest rate are:

• Overdraft fees if your account is overdrawn to make your payment or you exceed the balance on a revolving credit product like a line of credit.
• Insurance premiums if you decide to insure your loan.
• Discharge fees such as paying to have a lien or mortgage discharged.

It’s important to be aware of the extra fees on loans with high-interest rates. These lenders often advertise their rates as less than the maximum, such as 31.99%. However, when you factor in the other costs they charge that they don’t have to include in the interest calculation, you may be paying far more to borrow than you realize.

The maximum interest rate and Canada’s federal budget of 2023

The high rates some lenders charge can put you into a never-ending cycle of borrowing and debt. In order to lower these interest charges, advocates for low and middle-income earners have been lobbying the federal government for some time to reduce the maximum loan rates. As a result, the federal government addressed high-interest-rate loans in the 2023 budget.

Canada’s federal budget for 2023 intends to cap the maximum loan rate at 35%. It’s unknown whether the maximum rate of 35% includes additional charges and fees. In addition, payday loans are also addressed in the most recent budget. The federal government intends to make the maximum charge of $14 per $100 borrowed. Currently, it’s $15 per $100 borrowed or more.

The federal government intends to include the new maximum lending rates for loans and payday loans in the Criminal Code of Canada.

The appeal of high-cost loans

Why would you consider using an alternative lender or payday loan company? Well, you might consider a high-cost loan for several reasons:

• They will often approve a loan if you have bad credit or no credit.
• Some lenders don’t ask for income verification.
• It’s faster and easier than going to a traditional lender.
• They usually don’t require collateral as security for the loan.

How high-cost loans can hurt you

High-cost lenders are exactly that – extremely high-cost. The many disadvantages of dealing with a high-cost loan far outweigh any benefits you might receive. High-cost loans can lead to financial problems because:

• High-cost lenders can charge excessively high rates since they lend to people who find getting approved for credit elsewhere tricky.
• The interest costs and charges are far more than what you originally borrowed.
• The interest rates on these loans make the payments extremely high, which can put you in a position of having to borrow again to make your payments.
• High payments can limit your budget and trap you in a debt cycle because you won’t be able to afford other necessities or save for an emergency.

Maximum interest rates in Ontario

The federal and provincial governments govern Ontario’s interest rates. This is because the provinces have to comply with laws set by the federal government. Payday loans, however, are governed by provincial law. As a result, interest rates for payday loans vary in Canada from 35% in Quebec to 548% in Newfoundland and Labrador.

Currently, in Ontario, the maximum interest rate on payday loans is 391%. The maximum payday loan cost a lender can charge you is $15 per $100 borrowed. In order to be exempt from the federal government’s interest rate cap of 60%, payday loans cannot exceed $1,500, and you must repay it within 62 days. As stated, the federal government intends to lower the maximum interest charged on payday loans to $14 per $100 borrowed.

It doesn’t sound too pricey when lenders present the cost of a payday loan in these terms. However, it’s essential to remember that you are only borrowing the money for a very short time. When you consider the interest rate annually, payday loans will cost you more than ten times the interest rate of most credit cards.

Payday loans can be incredibly damaging to your finances. Due to the excessive interest they charge, it’s easy to become caught in a debt trap, where every paycheque is going to pay off the payday loan from the last paycheque.

Relief From High-Interest Rate Loans

The use of high-cost loans has increased over the last few years. You may have had a hard time managing all your expenses, like inflation, rising interest rates, job loss, or reduced hours at work. If you’ve had to use high-interest or payday loans and are struggling under a mountain of debt, help is available.

John Adamson, a Licensed Insolvency Trustee , of Adamson & Associates Inc. and our team can offer solutions for your debt like credit counselling, a Consumer Proposal or Bankruptcy to help you get a fresh start.

Please contact us for a free consultation at 519-310-5646.