Every season has its own charm. In North America, December brings…shopping! But January brings…bills. Credit cards and ‘buy-now-pay-later’ plans have made it ever-so-easy to spend more than we earn, so interest rates can have a huge impact on consumer finances.
Interest rates - are they ‘criminal’?
On the day this blog was written, the RBC posted its prime rate of interest at 2.70%. On the same day, credit card interest rates charged by banks had annual interest rates that varied from 11.99% to as high as 29.99%! To consumers, such rates seem almost criminal.
Most people are not aware that the law in Canada does prescribe a ‘criminal’ rate of interest. Under s.347 of the Criminal Code of Canada, interest rates must not exceed 60%. Fortunately for borrowers, ‘interest’ under the Criminal Code includes interest, fees, fines, penalties and commissions. As a result, businesses need to be careful that the total cost of interest and ‘extra charges’ does not exceed the 60% mark. The maximum penalty for charging more than 60% interest is $25,000 and/or 6 months imprisonment.
Some business can legally charge more than 60% interest. The Criminal Code provisions do not apply to payday loans, if the payday loan is for less than $1500 AND the loan is for 62 days or less. The lender must also be licensed in a designated province.
Many non-profit organizations, such as the Association of Community Organizations for Reform Now (ACORN) are advocating for the Criminal Code of Canada to lower the criminalized interest rate from 60% to 30%. On the provincial side, Ontario is currently reviewing the regulation of the financial services sector. Initial reports are urging the government to more closely regulate payday loan and rent-to-own businesses in order to improve consumer protection.
What are the rules for disclosing the actual interest rate?
The fine print in many contracts states that “interest on overdue accounts will be charged at the rate of -% per month”. Consumers (and businesses) should be aware that under the Interest Act (Canada), if the rate is not expressed as a yearly rate, the interest rate will be read down to 5% per year.
Provincial consumer protection legislation also requires disclosure of interest costs. The Ontario Consumer Protection Act has detailed rules for the calculation of interest costs, and the disclosure of those costs. Consumers have remedies against business that do not follow the rules. Depending on the circumstances, a consumer could ‘get out of’ the contract (rescission), or avoid payment of the undisclosed or excessive interest charges.
In recent years, Canadian courts have also been willing to impose obligations on federal banks to fully disclose all charges to credit card holders, including currency conversion charges. This means that when you use your credit card out of the country, or when you purchase a product online from a site that does not take Canadian currency, your credit card company or bank acquirer now has an obligation to disclose the conversion charge they are charging you.
Takeaway:
- Under the Criminal Code, interest cannot be more than 60% (annually)
- “Interest” under the Criminal Code includes interest, fees, fines, penalties and commissions
- Under the Interest Act, interest must be disclosed as an annual interest rate, otherwise it will be read down to 5%
- Consumer Protection Laws require disclosure of interest costs and give consumers rights if businesses do not follow the rules