Gary Schwartz
President | CEO
CLA Risk Roundtable Study on Including Insurance in the APR
With Finance Canada’s most recent consultation on further changes to the allowable rate of interest, as part of its broader budget measures, Canadians, particularly those who stand to lose access to vital credit and insurance options. https://www.canada.ca/en/
The government is proposing the inclusion of credit insurance as part of the cost of borrowing. Unlike default insurance, which is directly linked to loan repayment, credit insurance is an optional product, independent of the loan itself. Consumers are not mandated to purchase it, and lenders are not obligated to offer it. Yet, under the new rules, credit insurance could be counted towards the overall cost of borrowing, a misstep that could lead to unnecessary confusion and increased costs for borrowers.
Furthermore, these changes appear to conflict with existing regulatory frameworks. Canada’s current consumer protection regulations have evolved to strike a balance between ensuring transparency and fairness in lending while offering consumers flexibility. By grouping credit insurance into the cost of borrowing, the proposal introduces a level of inconsistency that threatens to undermine the very protections already in place.
👉 The Impact on Non-Prime Borrowers
But perhaps the most concerning aspect is how these proposed changes will affect consumers—those who already face limited options for both credit and insurance. By limiting access to credit insurance, many consumers who rely on these products as a financial safety net could be pushed further to the margins. In a world where financial stability is more uncertain than ever, reducing access to insurance products that protect against unexpected hardships is simply not sound policy.
The CLA’s Risk Roundtable recently conducted an analysis that highlights the adverse effects these proposed changes could have on non-prime borrowers. The government is already set to lower the maximum allowable interest rate to 35% starting in January 2025. This move will reduce access to credit for 5.4 million Canadians, particularly those in the non-prime sector. However, the latest proposal to also include insurance costs in the APR calculation could further restrict access for an additional 3.6 million non-prime Canadians.
In total, nearly 9 million Canadians could face a financial crisis due to these combined changes. Millions of borrowers who already struggle to qualify for loans from traditional financial institutions will be forced into precarious alternatives, such as payday loans or even illegal lending options, both of which carry far higher risks and costs.
👉 Why Credit Insurance Should Remain Separate
One of the most concerning aspects of the proposed regulations is the inclusion of credit insurance, specifically loan protection insurance, as part of the maximum APR. This insurance is designed to protect borrowers from unexpected events like job loss, illness, or death by covering their loan payments during times of hardship. It provides a vital safety net for millions of Canadians, particularly those in the non-prime sector, who are more vulnerable to financial disruptions due to limited savings and income.
Currently, loan protection insurance is a voluntary product that is separate from the core loan transaction. Including it in the APR calculation, which is capped at 35%, would make it nearly impossible for lenders to offer this product to non-prime borrowers. The CLA’s Risk Roundtable concluded that customers with interest rates between 27% and 35% would be the most affected, as lenders would no longer be able to offer insurance at economically viable rates. This would leave 3.6 million Canadians without access to insurance, exposing them to higher risks of loan delinquency, credit score damage, and bankruptcy.
👉 Unintended Consequences: Reduced Access to Credit and Insurance
The government’s decision to lower the maximum interest rate is well-intentioned, aiming to protect consumers from high-cost borrowing. However, the CLA’s research shows that the consequences will likely be the opposite. Instead of gaining protection, millions of Canadians will lose access to credit and insurance. The proposed inclusion of insurance costs in the APR calculation further exacerbates the problem by making a valuable financial product inaccessible to those who need it most.
By limiting access to loan protection insurance, the proposal would disproportionately affect vulnerable consumers who rely on it to avoid default during tough times. As a result, these borrowers would face a higher risk of financial distress, which could ultimately push them into even more precarious borrowing situations, including predatory payday loans. These changes will not lower borrowing costs but will instead reduce access to both credit and protective insurance, leaving many Canadians with few options for managing financial challenges.
👉 The Data Behind the Risks
The CLA’s Risk Roundtable has performed a detailed quantitative analysis to calculate the economic impact of including insurance costs in the APR. According to the findings, for loans with interest rates above 27%, it becomes economically unviable for lenders to offer loan protection insurance. This change could affect up to 3.6 million non-prime Canadians, depriving them of an essential financial safeguard.
Additionally, the expected claims costs for non-prime borrowers (who face higher risks of unexpected life events) combined with operating and administrative costs make it challenging for insurers to offer affordable coverage under the proposed APR cap. Without access to this coverage, non-prime borrowers will be left exposed to financial shocks, increasing the likelihood of defaults and bankruptcies.
👉 A Call for Collaboration and Responsible Policy
At the Canadian Lenders Association, we have long advocated for a balanced approach to consumer protection—one that preserves access to credit for millions of Canadians while ensuring responsible lending practices. Over the past two years, we have actively engaged with the federal government, offering our expertise and urging collaboration on solutions that support both consumers and lenders.
There is still time to reconsider these proposed changes. Policymakers must carefully assess the real-world consequences of including insurance costs in the APR calculation. Instead of rushing to implement policies that could inadvertently harm millions of Canadians, the government should pause, consult with stakeholders, and allow for a more measured and thoughtful approach.
The Canadian financial landscape is rapidly evolving, and the decisions made today will shape the future for millions of borrowers. By including insurance costs in the APR calculation, the government risks cutting off access to essential credit and protective insurance products for nearly 9 million Canadians. Instead of improving consumer protection, these changes could push non-prime borrowers into the arms of predatory lenders, leading to more financial hardship and instability.
The CLA remains committed to working with the federal government to find solutions that ensure fair access to credit and responsible lending.
Gary Schwartz is the President of the Canadian Lenders Association (CLA), representing over 300 companies dedicated to providing responsible credit solutions to small businesses and individuals across Canada.