Op-Ed: Non-prime Lending Ensures Access to Credit for Eight Million Canadians

by Gary Schwartz, originally published in The Hill Times.

If we focus on the wrong solution, the result will be an unintended outcome of reducing access to credit, pushing non-prime Canadians to high interest payday lenders, and keeping them in cycles of debt with no ability to rebuild their credit.

The government should proceed with caution, as there are unintended consequences with these policy proposals, that will remove access to credit for people who need it most and push them to payday lenders, charging rates as high as 600 per cent, writes Gary Schwartz.

There are eight million Canadians considered to be non-prime borrowers because they have low credit scores. Many are viewed as ‘higher-risk borrowers,’ and have difficulty getting credit from traditional financial institutions such as banks. Non-prime alternative lenders help these borrowers access credit, build their credit score and graduate to better interest
rates.

The non-prime alternative lending market, regulated by Sec. 347 of the Criminal Code of Canada, lends at rates up to 47 per cent APR. In contrast, the payday lending sector, which provides credit at interest rates as high as 600 per cent, is exempt from the Criminal Code provision and wouldn’t be impacted by a reduction to the maximum allowable rate under Sec. 347.

This means the most vulnerable Canadians—those who are unable to access credit from traditional financial institutions—will be negatively impacted by policies that close the door to non-prime alternative lenders, while leaving the door open to payday lenders. The outcome is that consumers will have no choice but to borrow from payday lenders when they need access to credit.

Canadians need open access to credit. An unexpected emergency or an unanticipated job loss may result in the need to borrow money. A recent study commissioned by the CLA using the credit scores of all Canadians finds 80 per cent of those eight million non-prime consumers will be negatively affected by a lowering of the maximum rate of interest. These consumers will struggle even more to access credit when they need it.

Where will these millions of Canadians turn for credit if non-prime loans are not available? They will be pushed to payday loans or, as a last resort, loan sharks and dark alleys. That may sound like fear mongering, but a recent poll by Pollara Strategic Insights (commissioned by the CLA) found that 28 per cent of Canadians who didn’t qualify for prime-interest bank credit have considered going to loan sharks. That figure rises to 47 per cent among people accessing payday loans.

We all share the same goal in improving consumer outcomes and helping Canadians achieve financial stability. Achieving this goal needs to ensure that non-prime Canadians can continue to access credit while rebuilding their credit score. The members of the CLA are not the enemy to this goal, but instead are the vehicle to achieve it. We believe the solution must be to improve options for non-prime Canadians, while enhancing access to financial literacy.

Non-prime lenders of the CLA ensure that consumers can graduate to a better credit score and are able to become prime borrower by reporting payments to the credit bureaus and providing financial literacy education on how to rebuild their credit. Payday lenders do not do this.

If we focus on the wrong solution, the result will be an unintended outcome of reducing access to credit, pushing non-prime Canadians to high interest payday lenders, and keeping them in cycles of debt with no ability to rebuild their credit.

Gary Schwartz is president of the Canadian Lenders Association.