“If we really want to help vulnerable Canadians, we need to do more than just adjust interest rates,” says Bruce Sellery, CEO of Credit Canada. “We need to look at the bigger picture – offering cheaper credit options, better financial support and the tools people need to take control of their finances.”
The unintended consequences of lower-interest short-term loans
Here’s how the brand new credit changes may impact each borrowers and lenders in Canada:
borrower
While these changes are intended to assist borrowers, in the long term they may find yourself making things tougher for Canadians. Due to lower rates of interest, lenders are more likely to be less willing to approve the variety of loans previously originated, tightening eligibility requirements and making it tougher for Canadians and newcomers to Canada to qualify. This could push borrowers into riskier decisions reminiscent of pawnshops, illegal lenders and even unregulated foreign lenders, potentially leaving them with more debt than they originally had.
Another problem: Lower rates of interest could give borrowers the misunderstanding that loans are actually “affordable.” This could cause them to delay in search of financial help from trusted organizations like Credit Canada and depend on high-interest loans, making their situation worse over time.
Lender
The latest rules may lead to difficult decisions for lenders. One lender said it was already rejecting more loan applications because lower rates of interest didn’t leave enough room to cover the associated risks of some loan applicants. Non-prime lenders, which usually serve individuals with lower credit scores, may reduce the variety of loans they provide overall. This could make it tougher for some Canadians to access credit after they need it most.
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How will the brand new loan changes affect you?
The penalty rate changes will impact how some people in Canada access credit. Borrowing can grow to be tougher for financially vulnerable Canadians who often depend on short-term loans or high-interest loan products. On the intense side, the change will lead to lower rates of interest on certain loans, which could help ease the financial burden for a lot of borrowers.
However, there’s a downside. Fewer available credit options may lead some Canadians to show to riskier, unregulated lenders. It jeopardizes the transparency of the terms and conditions and makes things like high fees, hidden costs and repayment plans unclear.
These varieties of lenders lack consumer protection, putting borrowers liable to falling deeper into debt. This makes our efforts in financial education and planning all of the more necessary.
