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Difference between revisions of "Interest and the Cost of Borrowing Money"
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Interest and the Cost of Borrowing Money (view source)
Revision as of 03:22, 6 September 2018
, 03:22, 6 September 2018no edit summary
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=== Interest rate ceilings=== | === Interest rate ceilings=== | ||
There is little in either federal or provincial law regulating the maximum amount creditors can charge borrowers. Some years ago, the federal government repealed the interest rate ceilings set under its Small Loans Act. In its place, Parliament passed an amendment to the ''Criminal Code'', setting a maximum interest rate in [https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-46/latest/rsc-1985-c-c-46.html#sec347_smooth section 347] of 60% per year for all lenders. The section applies to all consumer credit lenders except tax refund buyers and licensed payday loan lenders. Anyone who lends at a higher rate can be prosecuted. And, according to an historic common law principle that courts will not enforce an “illegal” contract, creditors generally cannot use the civil court system to collect on loans where the rate is above 60% per year. | There is little in either federal or provincial law regulating the maximum amount creditors can charge borrowers. Some years ago, the federal government repealed the interest rate ceilings set under its ''Small Loans Act''. In its place, Parliament passed an amendment to the ''Criminal Code'', setting a maximum interest rate in [https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-c-46/latest/rsc-1985-c-c-46.html#sec347_smooth section 347] of 60% per year for all lenders. The section applies to all consumer credit lenders except tax refund buyers and licensed payday loan lenders. Anyone who lends at a higher rate can be prosecuted. And, according to an historic common law principle that courts will not enforce an “illegal” contract, creditors generally cannot use the civil court system to collect on loans where the rate is above 60% per year. | ||
Both the federal and provincial governments have laws setting a maximum rate for how much a person can be charged if someone buys their right to receive money from the government. The most common examples of such rights are for refunds for an overpayment of tax paid under the Income Tax Act, contributions paid under the Canada Pension Plan, and premiums paid under the ''Employment Insurance Act''. | Both the federal and provincial governments have laws setting a maximum rate for how much a person can be charged if someone buys their right to receive money from the government. The most common examples of such rights are for refunds for an overpayment of tax paid under the ''Income Tax Act'', contributions paid under the Canada Pension Plan, and premiums paid under the ''Employment Insurance Act''. | ||
The [http://canlii.ca/t/j03h federal law] says the person selling their right to a refund from the government (the borrower, effectively) must get at least a minimum amount: | The [http://canlii.ca/t/j03h federal law] says the person selling their right to a refund from the government (the borrower, effectively) must get at least a minimum amount: | ||
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The rate the lender (that is, the business buying the refund) must disclose to the borrower is calculated according to a formula prescribed in regulations to the [http://canlii.ca/t/7vm3 ''Tax Rebate Discounting Act'']. | The rate the lender (that is, the business buying the refund) must disclose to the borrower is calculated according to a formula prescribed in regulations to the [http://canlii.ca/t/7vm3 ''Tax Rebate Discounting Act'']. | ||
Many years ago, the federal government passed the [http://canlii.ca/t/7vh8 ''Interest Act'']. However, this relatively short law does not set interest rate ceilings. For consumer loans, the ''Interest Act'' simply says that contracting parties are free to bargain for any interest rate they want in the agreement (subject only to other specified federal statutes, such as the ''Tax Rebate Discounting Act'' and the interest ceiling in the http://canlii.ca/t/7vf2 ''Criminal Code'']). | Many years ago, the federal government passed the [http://canlii.ca/t/7vh8 ''Interest Act'']. However, this relatively short law does not set interest rate ceilings. For consumer loans, the ''Interest Act'' simply says that contracting parties are free to bargain for any interest rate they want in the agreement (subject only to other specified federal statutes, such as the ''Tax Rebate Discounting Act'' and the interest ceiling in the [http://canlii.ca/t/7vf2 ''Criminal Code'']). | ||
The ''Interest Act'' also says that if interest is to be calculated on less than an annual basis (daily, weekly, monthly, etc.), the borrower must also be given a yearly rate. If there is no agreed rate of interest (which rarely happens), the ''Interest Act'' says a creditor can only charge 5% annual interest. | The ''Interest Act'' also says that if interest is to be calculated on less than an annual basis (daily, weekly, monthly, etc.), the borrower must also be given a yearly rate. If there is no agreed rate of interest (which rarely happens), the ''Interest Act'' says a creditor can only charge 5% annual interest. | ||
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Provincially, credit cost disclosure is governed under the [http://canlii.ca/t/84mr ''Business Practices and Consumer Protection Act''], Part 5. There are different disclosure requirements for fixed credit (such as loans, mortgages and sales financing agreements), open credit (such as lines of credit and credit cards), and some leases. Fixed and open credit agreements require disclosure of the annual interest rate and the circumstances under which interest will be compounded. Leases and fixed and open credit agreements, which are not credit cards, must disclose the annual percentage rate calculated in accordance with the regulations. | Provincially, credit cost disclosure is governed under the [http://canlii.ca/t/84mr ''Business Practices and Consumer Protection Act''], Part 5. There are different disclosure requirements for fixed credit (such as loans, mortgages and sales financing agreements), open credit (such as lines of credit and credit cards), and some leases. Fixed and open credit agreements require disclosure of the annual interest rate and the circumstances under which interest will be compounded. Leases and fixed and open credit agreements, which are not credit cards, must disclose the annual percentage rate calculated in accordance with the regulations. | ||
If a fixed credit agreement has scheduled payments, the disclosure must include the total cost of credit. In the case of a lease covered by Part 5 of the Business Practices and Consumer Protection Act, the statement must disclose the total lease cost. Part 5 of the Act also sets out disclosure requirements for floating rate credit agreements, and amendments or renewals of credit agreements. | If a fixed credit agreement has scheduled payments, the disclosure must include the total cost of credit. In the case of a lease covered by Part 5 of the ''Business Practices'' and ''Consumer Protection Act'', the statement must disclose the total lease cost. Part 5 of the Act also sets out disclosure requirements for floating rate credit agreements, and amendments or renewals of credit agreements. | ||
Related topics and materials | Related topics and materials | ||