On 31 May 2024, an Order in Council appeared within the Canadian government, and it came into effect at the start of 2025. The maximum criminal rate of interest had been 60% EAR (effective annual rate). As of 1 January, that number dropped to 35% APR. For comparison purposes, the former level is equivalent to approximately 48% APR, so this is a significant decrease. This policy change was a part of the Canadian government’s priority of shielding consumers from ongoing cycles of debt while also maintaining the interests of commercial lenders.
What is the “criminal” rate of interest?
According to Section 347 of the Canadian Criminal Code, the criminal interest rate is the maximum rate that lenders can charge on a loan in Canada. The purpose for this is to deter loan sharking and other predatory lending practices. Setting one nationwide rate allows for an objective prosecution standard. This applies to the majority of credit agreements, including credit cards, lines of credit and installment loans. Transactions under the Tax Rebate Discount Act and some payday loan agreements may not fall under this law.
How does APR work?
This term refers to the annual interest that comes from a sum paid to investors or charged to borrowers. APR is written as a percentage that shows the actual annual cost of funds over the life of a loan or the actual annual income from an investment. The APR includes fees and other costs connected to the transaction but does not include compounding in the calculation. Consumers can use the APR to compare among investment products, credit cards, or other lending opportunities. Financial institutions are required to disclose the APR of any financial instrument before agreements are signed. Because there is some leeway in APR calculation, particularly in the inclusion or exclusion of some fees, an APR may not accurately reflect the actual cost for the borrower. The APR is different from the APY (annual percentage yield), which also includes interest compounding.
With a loan, the APR calculates the percentage of the principal that the borrower will pay each year by considering fees and monthly payments. You can calculate APR by multiplying the periodic interest rate by the number of periods in which it was applied in a given year. Bank loans usually come either with fixed or variable APRs; the difference is that with a variable APR, the interest can change at any time over the loan term, while fixed APRs keep the same rate for the entire term.
With credit cards, APRs can vary depending on whether the interest is being charged on purchases, cash advances, or balance transfers from other cards. When payments are late, then a higher APR can be charged as a penalty. Some cards come with a low introductory APR, even as low as zero percent, that increases after a period of time established in the card documentation.
How does the new criminal rate of interest compare to the previous level?
The following types of loans are subject to the new law:
- Loans for amounts of $10,000 and below are capped at 35% APR;
- Pawn loans of less than $1,000 in cases where the only default recourse is seizure of the property pawned as collateral are now capped at 48% APR, which is comparable to the existing 60% EAR cap;
- Commercial loans between $10,000 and $500,000 will have a maximum rate of 48% APR, comparable to the existing 60% EAR cap;
- Commercial loans greater than $500,000 will not have any cap on interest rate.
By definition, a commercial loan is a loan in which:
- The borrower is not an actual person;
- The borrower is utilizing the deal for commercial or business purposes, AND the loan is for between $10,000 and $500,000, with a maximum APR of 48%, or the amount is greater than $500,000, in which case no cap exists.
While commercial loans in excess of $500,000 do not face any interest cap limit, loans for that amount made to individuals would appear to face the new cap. This could affect the market for such products as capital call loans, where the borrowers are generally individuals, and the loans may be greater than $500,000.
For Amansad Financial Services, brokering and lending is business as usual because the loans we arrange not only well below the legal limit and are also conscionable (fair). Reach out to find out how we can help you today.