2023 Federal Budget: Fictional Hannah Vs. Real Hannah

In the 2023 Federal Budget, there is a fictional illustration of Hannah, a single mother in Guelph who makes $35,000 as a cleaner at a hospital. The government celebrates that Hannah will save $775 over the life of a hypothetical $5,000 loan with the new 35% APR cap. The reality is that Hannah will no longer be able to access $5,000. In fact, Hannah will no longer qualify for a loan and will have to turn to payday lenders to obtain funds. She will not be able to rebuild her credit and will be stuck in a cycle of debt.

Here’s why:

• Hannah currently qualifies for a loan at 46.9% interest rate – the highest interest rate available in the Canadian marketplace. This means that Hannah has a very low credit score – the reason why the traditional banks in the example have turned down her request for credit.
• Canadians with low credit scores who previously qualified for loans at rates between 46.9% and 35% will no longer qualify for alternative loans, as their credit scores will be too low and will not meet the minimum thresholds for lenders to extend funds.
  • These Canadians have a higher rate of default, which lenders price into their rates, and is directly reflected in lender acceptance rates.
  • Lenders can’t simply extend funds to Canadians with a high risk/rate of default – this would make lending businesses unsustainable.
  • Many alternative lenders report payments to the credit bureau. Payday lenders do not. Hannah would have been able to rebuild her credit score and graduate to prime lending with on-time loan payments on her $5,000 loan.

Hannah’s Alternatives

• With this new policy change, Hannah’s option to obtain funds for her car repairs will be with a payday lender. The 2023 Budget allows payday lenders to charge Hannah a maximum interest rate of approximately 364% for her loan ($14 per $100).
• Since payday loans are generally capped at $1,500 each, Hannah will require 4 payday loans to get the $5,000 she needs for her car repairs.
• Due to the changes announced in Budget 2023, Hannah will owe $6,000 to payday lenders at an interest rate of 364%, rather than owing $5,000 at a rate of 46.9%
  • If Hannah is unable to get 4 payday loans, she will have to turn to pawn shops or illegal lending to obtain her loan.
  • If she cannot obtain funds from any sources, she will not be able to repair her car to get to her job. Hannah then faces the real risk of losing her job and not being able to support her children.

Hannah is clearly not better off with this federal government policy change and will be cut off from access to credit for her lending needs.

Hannah’s story in the Federal Budget

Hannah is a single mother in Guelph who makes $35,000 as a cleaner at a hospital. Her car broke down and she needs $5,000 for immediate repairs so she can get to her job. Hannah works hard, but as a result of the debts she has accumulated to support her children, traditional banks will not lend her money. In need of money quickly, Hannah turns to a lender who has been advertising across town and takes out a loan with a 46.9 per cent interest rate.

Weeks later, Hannah realizes that she will need to borrow more money to repay this loan, and has suddenly found herself trapped in a cycle of debt. With changes the federal government is making to the criminal rate of interest, the highest interest loan that Hannah could receive would be no more than 35 per cent. On a $5,000 loan with a two year amortization period at the new rate, she will have saved $775 over the life of the loan.