Whenever you seek a loan, be it a mortgage, line of credit, or auto loan, you need to consider the interest rate your lender will charge you. You can easily overwhelm your budget if you get stuck with too many loans with steep interest rates. This is particularly true in Ontario, where the cost of living is the highest in Canada.
Interest is the cost of borrowing money. The rate of interest you pay varies based on the loan type, the lender’s policy, your credit score, and various other factors. One crucial aspect is the risk of default. The greater the chance you’ll fail to repay the loan, the higher the interest you can expect the lender to charge you.
However, banks, credit unions, and other lending companies aren’t free to set interest rates as high as possible. Government regulations limit what they can legally charge to borrowers.
What’s the maximum interest rate a lender can charge you in Ontario?
Currently, Ontario has no legislation restricting the interest rates lenders can set on loans they issue. However, under Section 347 of the Criminal code of Canada, it’s illegal for any lender to charge a rate that exceeds 60%. Since the law applies across the country (with the notable exception of Quebec), the highest interest rate lenders can charge in Ontario is 60%.
An exception applies to payday loans. Lenders who issue payday loans are exempt from the 60% rule. Instead, payday loan companies are regulated provincially, where specific restrictions apply to the fees they charge to borrowers.
Payday loans in Ontario – what you can expect to pay
In Ontario, payday loans are subject to regulations under the Ontario Payday Loans Act.
The legislation dictates the maximum amount a payday loan company lender can charge borrowers for loans it issues. As of 2018, the highest amount a lender can charge you is $15 for every $100 you borrow over two weeks (including all applicable fees). It may not seem like a lot, but this works out to $390 in fees or an annual interest rate of 390%!
However, this rule only applies if you repay the loan on time. If you fail to pay the principal + fee by the due date, the lender can charge you extra fees. Thus, you can end up paying a rate that exceeds 390%.
Luckily, Ontario places several other restrictions on how payday loan lenders may operate their business. For example, borrowers aren’t allowed to “roll over” their payday loans – they must repay their initial loan in full before applying for a new one with the same lender. But while this rule helps to prevent fees from piling up, the borrower is still free to obtain a new payday loan from another lender.
Typical interest rates on various loans in Ontario
Besides payday loans, a wide range of other loans are available in Ontario, all bound by the 60% rule.
The interest rates lenders charge on loans vary based on many factors. In general, the riskier the loan (meaning, the greater the likelihood of you defaulting on your payments), the higher the interest rate you must pay.
When you apply for a loan, you can anticipate paying a higher interest rate if:
- The loan is unsecured, meaning you haven’t pledged an asset as collateral
- The interest rate is fixed, meaning the rate you pay will never change during your loan’s term
- The loan is repayable over a long time period
- You have a poor credit score
- You earn a low or inconsistent income
- Your current debt obligations are high relative to your income
Conversely, you can expect lenders to charge you a lower interest rate if:
- The loan is secured
- The interest rate is variable, meaning the rate you pay may fluctuate during the loan’s term
- The loan is repayable over a short time period
- You have a strong credit score
- You earn a high, reliable income
- Your current debt obligations are low relative to your income
Below is an overview of the interest rates you expect to pay on various loans.
|Loan Type||Typical Interest Rate|
|Mortgage||4% – 6%|
|Personal loan||6% – 13%|
|Personal line of credit||6% – 13%|
|Credit card||9% – 30%|
|Auto loan||2% – 10%|
|Home equity line of credit (HELOC)||4.5% – 6%|
|Bank overdraft||21%, plus an overdraft fee per each transaction|
|Payday loan||Maximum of $15 per 100 over two weeks (390% annually)|
|Loans from finance companies||20% – 45%, plus administrative fees and other charges|
Are interest charges straining your budget and causing you stress? Here are some ways to get your debt under control
Suppose you’ve taken on too much debt over a short period. In that case, your interest charges can snowball, leaving you struggling to pay for everyday expenses, like groceries, utilities, and fuel for your car. As a result, you should establish a plan to deal with it immediately before the interest grows too large for you to handle. It’s especially crucial to act if interest rates are on the rise.
Here are some tips for managing your debt:
- Revamp your budget to dedicate more disposable income to debt payments. Paying down your debt faster will result in fewer interest charges piling up.
- Prioritize paying off loans with the highest rates first. You’ll save money on interest charges in the long run.
- Pay off variable rate loans before fixed rates loans. The former exposes you to sudden interest rate spikes, increasing the amount of interest you must pay.
- If general interest rates decline, consider refinancing your mortgage to lock in a cheaper rate.
- Consider switching from a variable-rate mortgage to a fixed-rate mortgage so that you can benefit from a predictable payment schedule.
- Pay down secured debt first to avoid your lender repossessing your assets.
- Negotiate a lower interest rate with your lenders
- Use a debt consolidation loan or balance transfer credit card to merge your existing debt at a cheaper rate.
- Strive to pay at least the minimum payment required on your credit card by the due date. Late payments will impair your credit score.
But what if your debt is already too overwhelming for you to manage? In that case, you may want to explore what a consumer proposal offers.
A consumer proposal is a debt-relief program offered by the Government of Canada. It allows individuals to discharge a considerable chunk of unsecured debt they owe (credit cards, payday loans, etc.) – up to 80% in some cases.
By filing for a consumer proposal, you can negotiate a new payment plan with your creditors and work to pay down the balance over five years. Your creditors won’t be able to seize your assets or pursue legal action against you – and interest charges will stop automatically!
Bankruptcy is another government debt relief program to consider. But, in most cases, a consumer proposal is more than enough to alleviate your debt burden and comes with less severe financial consequences. Learn how a consumer proposal and bankruptcy differ and what each has to offer.
A Licensed Insolvency Trustee is the only professional that can administer a consumer proposal in Canada. At David Sklar & Associates, we can review your debt situation and help you create a new debt payment plan. We’ll ensure that it’s fair and reasonable to you and your creditors, so everyone wins.
Once the paperwork is complete, you can proceed confidently to pay off your remaining debt. No more tough decisions that involve choosing between putting food on the table and making a minimum payment on your credit card.
See how much you can save using our consumer proposal calculator. Or, if you’re ready to chat, contact us for a free no-obligation consultation.
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