Canada Legislation

Canadian Payday Loan Legislation

Canadian law has had numerous efforts to legislate against unreasonable interest rates throughout time. These include the Small Loans Act of 1950, the usury law in 1980 (now found in section 347 of the Criminal Code), and also numerous failed attempts dating back to 1867 where interest rates caps as low as 6% have been proposed.

From 1980 up until 2006, interest rates in Canada were limited to 60% per year under the usury law. The means of calculating annual interest for the purposes of determining whether it is criminal or not were set out by the Canadian Institutes of Actuaries in 1992:

A(1+I)t=B

where

A = principal

I = interest rate

t = time (in years)

B = repayment amount

For example, a loan of $100 for 1 month that charges $10 would be calculated as

100(1+I)1/12=110

solving for I gives I=2.1384, or around 214% annual interest.

This calculation raised a number of issues with respect to two basic categories of loans:

high risk ventures where the potential return was extremely high
small valued loans where processing fees caused the effective rate to be extremely high

Payday loans fit into the second category, where the cost of providing a $100 loan can easily exceed $10 without even factoring in the risk of the borrower defaulting on the loan. Payday lenders used a number of methods to get around this problem, typically by shifting the expenses around into items they believed were not interest, including insurance and cheque cashing fees.

Starting in 2003, a number of class action lawsuits against most of the major payday lenders in Canada lead to a conundrum for the government. The courts decided that insurance and cheque cashing fees, and indeed any fee whatsoever associated with a loan, was in fact interest. The plaintiffs prevailed in virtually all of these cases, which meant that since all the previous loans were illegal, all future loans would also be illegal. What once had been a legal grey area was now clearly illegal, yet millions of Canadians were using these services. The government did not want to eradicate the system entirely given the demand for short term credit. On the other hand, payday lenders had become notorious for business practices that were clearly contrary to the public good such as:

rollover loans
high interest rates
unscrupulous collection practices

After a period of public consultation, as well as a substantial amount of lobbying by the payday lending industry and the Canadian Payday Loan Association, the federal government carved out an exception to the usury laws. Under the amendment, section 347.1 of the Criminal Code, any loans under $1500 with a term of less than 62 days would be exempt from the usury law, so long as they were issued in a province that had enacted provincial regulations governing payday loans.

With the exception of Quebec and Newfoundland, every province has chosen to pursue legalization of payday loans, with varying degrees of oversight. New Brunswick is the only province that has decided to legalize payday loans that hasn't completed their legislative efforts. Each of the provinces that has regulated payday loans has opted at the very least to limit the maximum rates of interest, prohibit rollover loans, and specify cost of credit disclosure practices. Beyond that, each province has taken a unique approach to consumer protection goals. For information on individual provinces, see below:

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