Many Canadians May No Longer Qualify for Loans Under New Regulations, Lenders Warn

Canadians are less than enthusiastic about costly climate programs as inflation causes prices to soar. (Nicholas Kamm/AFP via Getty Images)

Canadians are being warned that they may no longer qualify for future loans from regulated lenders due to new government restrictions that cap interest rate charges at 35 percent.

The information was in a letter from the Canadian Lenders Association (CLA) in response to the government’s decision, which was part of a Regulatory Impact Analysis Statement released on Dec. 23, 2023.

The government proposed in Budget 2023 to lower the criminal interest rate to 35 percent APR (annual percentage rate) and to change the maximum amount that payday lenders can charge people for the amount they borrow.

CLA said the decision will impact who qualifies for many types of loans moving forward.

“The Government of Canada recently announced that they will be lowering the allowable rate of interest, which directly affects the number of borrowers that lenders can qualify for a loan,” the CLA letter said. “This change results in lenders having to deny many borrowers and removes your freedom to make the decision to borrow for yourself.”

The letters are being sent out to customers of the 300 companies that CLA represents, including banks and installment lenders.

“While on the surface, reducing the maximum allowable interest rate may sound helpful, this change in fact means many borrowers may no longer be able to access a loan in the future, including from other regulated lenders across Canada,” CLA said.

“As a result, consumers may have to rely on other sources of credit, such as an expensive payday loan, which often costs more than six times the price of a loan from us.”

Lenders in Canada often rely on an individual’s credit score to determine their eligibility for a loan. This is a number between 300 and 900 that is given to consumers and relates to the individual’s credit history. According to Equifax, scores between 660 to 724 are “good,” 725 to 759 are “very good,” and a credit score of 760 and up is “excellent.”

Higher interest rates are charged to those who have lower credit scores. The CLA is advising that many Canadians will not be able to access loans if they have a low credit rating because the interest rate is capped at 35 percent, which is lower than some borrowers would be required to pay. Therefore, they will miss out on the opportunity to apply for a loan.

CLA said that it had been “actively discussing this matter with the Government of Canada for over two years.”

With a cap of 35 percent on most loans, the federal government said in the Dec. 23 document that the decision will “largely maintain the status quo.”

Canadians Facing High Debt Levels

The letters are being sent out as Canadians are being squeezed by high debt levels.

The National Payroll Institute has said 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.”

They also found that percent of Canadians were overwhelmed by their debt as 63 percent were spending all their net pay and 30 percent spending more than what they bring home.