Finance Minister Proposes 60 Percent Interest Rate Remain for Pawn Loans

A file photo of a Canadian dollar coin, or a "Loonie." Mark Blinch/Reuters

Finance Minister Chrystia Freeland has proposed that pawnbrokers be allowed to continue to charge 60 percent interest on loans to Canadians, while the government plans to change the rules for other loan providers.

The notice was published in a Dec. 23, 2023, Regulatory Impact Analysis Statement, as first reported by Blacklock’s Reporter.

“Predatory lenders take advantage of some of the most vulnerable people in our communities, including low-income Canadians, newcomers to Canada, and those with limited credit history—often by extending very high-interest rate loans,” the statement says.

It notes that the current “criminal interest rate” is 60 percent effective annual rate (EAR). The EAR is called the “true interest rate” of a loan by Investopedia, as it also calculates compounding interest.

The current 60 percent EAR is equivalent to 48 percent on an “annualized percentage rate,” or APR, according to the government notice.

The statement says that the APR on “predatory loans” is being dropped to 35 percent in an effort to protect individuals from being caught in the “cycle of debt.”

For pawn loans under $1,000, however, the rate will remain at 60 percent EAR.

“Pawnbrokers argued that small dollar secured loans do not trap borrowers in a cycle of debt,” the notice reads. It says that because pawn loans are secured by collateral given to brokers by customers and then sold if the loan is not paid, people cannot become trapped in debt.

Pawn loans over $1,000 would be charged at 35 percent APR. The statement noted that “very few” pawn loans are issued over that amount, and the decision will “largely maintain the status quo.”

Ms. Freeland’s department also says that the 60 percent interest rate should apply to commercial loans over $10,000 and no interest limit should apply to loans over $500,000.

“Commercial transactions above $500,000 represent a level of sophistication that does not require protection,” the statement said.

Record Debt Levels for Canadians

As inflation increases along with the cost of living and housing, many Canadians are already caught in significant debt.

A CIBC poll released on Dec. 28, 2023, found that in 2024 people want to focus on paying down debt and boosting their savings.

Over a quarter of Canadians have taken on new debt in the last year, CIBC found. Forty-six percent of those who took on more debt did so because of the cost of living.

The National Payroll Institute says that the number of working Canadians who are “financially stressed” has jumped 20 percent in the last year to 37 percent.

“The frightening reality of this storm is that the contributing factors to financial stress are becoming more challenging than ever for Canadians to overcome,” said Peter Tzanetakis, president of the National Payroll Institute.

“With interest rates, inflation, and the cost of living all continuing to rise, for many working Canadians navigating these factors have negatively impacted their financial wellness, and they need to take immediate and urgent action to keep from being overcome.”

The study also found that 63 percent of Canadians spend all of their net pay, with 30 percent spending more than what they bring home. This has led to 50 percent being overwhelmed by their debt.

In September, the Canadian Mortgage and Housing Corporation found that about a quarter of Canadians were struggling to pay their mortgages. It was particularly difficult for those under 35 years old.

Additionally, the number of those who said they are confident they can maintain their mortgage payments dropped from 90 percent in 2022 to 78 percent in 2023.

Short on Cash

It’s not just paying mortgages that has Canadians strapped; the Chartered Professional Accountants found that one in four could not come up with $500 cash if needed unless they borrowed the money or sold something.

Nearly half of participants (46 percent) are carrying debt other than a mortgage, and 57 percent with non-mortgage debt said they had carried over a credit card balance over the past 24 months.