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Lowering interest rate cap to 35% to cost jobs and GDP



A commissioned report by the Canadian Lenders Association warns of dire consequences if the maximum interest rate is lowered. The report, conducted by Ernst & Young LLP, suggests that such a move could result in the loss of tens of thousands of jobs and billions of dollars in GDP.


This report comes amid the CLA's vigorous opposition to the federal government's proposal to decrease the interest rate cap in the Criminal Code from 47.2 percent to 35 percent. The government's rationale behind this initiative is to shield vulnerable borrowers, such as low-income individuals, newcomers, and seniors, from predatory lending practices.


The CLA contends that implementing a lower rate cap would render it financially unviable for lenders to extend credit to higher-risk borrowers, as potential profits would be outweighed by the risk of defaults. According to the Ernst & Young report, approximately two million consumers could be at risk of disqualification, with around 818,000 individuals actually being excluded from access to credit. Moreover, nearly 18,000 businesses and 32,000 jobs could be displaced if the lower cap is enacted.


Gary Schwartz, head of the CLA, emphasized the detrimental effects this change could have on the Canadian economy, citing the report's estimations of potential GDP losses amounting to $10.7 billion and the risk of nearly 50,000 job losses. Additionally, borrowers might incur an extra $4.4 billion in interest expenses as they resort to payday loans or unregulated lenders.


However, Katherine Cuplinskas, press secretary to Finance Minister Chrystia Freeland, dismissed claims that lenders would deny credit to vulnerable individuals, labeling such suggestions as irresponsible. Cuplinskas pointed out the significant profit margins enjoyed by many lenders, implying that they have no need to cut off borrowers.


Support for the proposed lower cap has also come from anti-poverty advocacy groups like Acorn Canada and Prosper Canada. Elizabeth Mulholland, CEO of Prosper Canada, testified before the Standing Committee on Finance, asserting that the lower cap is necessary to protect borrowers from exploitative lending practices. Mulholland argued that high-cost loans only exacerbate the financial challenges faced by low-income individuals and can trap them in cycles of debt.


In conclusion, the debate over lowering the interest rate cap underscores the complex interplay between financial accessibility and consumer protection. While proponents argue for safeguarding vulnerable borrowers, opponents warn of unintended consequences that could harm both lenders and the broader economy. Ultimately, policymakers must carefully weigh these competing interests to formulate effective and equitable regulatory measures.


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