Consumers' Experience with Higher Cost Credit


Consumer Council of Canada


Consumers Council of Canada (CCC)




Instalment loans are the fastest growing type of credit in Canada. The growth of these loans is largely a response to the tightening of regulations on payday loans by provincial legislatures, which has caused lenders to seek alternative forms of credit to offer high-risk consumers. Almost all of Canada’s provinces have passed laws regulating loans with interest rates between 30-60%--which are higher than credit cards, but lower that the limit set out in the Criminal Code. The objective of this Consumer Council of Canada (CCC) report is to provide insights into consumer experiences while shopping for instalment loans. To investigate this issue, CCC conducted 93 audits of selected loan instalment stores across Canada. CCC also reviewed academic reports, provincial consumer protection legislation, and best practices from other jurisdictions.

CCC found that instalment loans are an incredibly expensive form of credit. While these lenders usually charge nominal interest rates that are well under the 60% limit set out in the Canadian Criminal Code, the effective rate is actually far higher, which brings into question whether the existing legislation safeguarding consumer interests is adequate. CCC also highlighted issues with legislation requiring the full disclosure of information to customers. In fact, lenders generally present consumers with the final contract very quickly at the point of sale. Lenders may also engage in misleading practices, such as embedding optional charges within the quoted repayment amounts, which are excluded from the calculated interest rate. This can cause consumers to pay an additional 50% to the total amount repaid. Lenders may also opt for longer loan durations, subtly inflated borrowing amounts, and more frequent payment, all of which result in borrowers paying higher interest rates than disclosed.

CCC concludes that providing consumers with more comprehensive information on how interest rates work—particularly with regard to compound interest--would enable them to make more informed decisions. Consumers would also benefit from more thorough knowledge on usury limitations in the Canadian Criminal Code. Finally, CCC recommends exploring suitability testing to determine whether some of the optional charges being offered are legitimate.

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OCA Funded Research
This research received funding support through the Office of Consumer Affairs' Contributions Program.

Contact information

Consumers Council of Canada
201-1920 Yonge Street
Toronto, ON  M4S 3E2
(416) 483-2696

Source: Consumer Policy Research Database

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