Apr 5, 2026
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You need $5,000 for a car repair, an overdue bill or an unexpected expense. Your credit score is less than perfect, so the big banks aren't an option. You turn to an alternative lender — but they turn you away. So you search online for someone, anyone, willing to help.
While common, this scenario caught the attention of the police — with a warning that as many as 4.7 million Canadians may be pushed into payday loans or illegal lending due to new lending rules (1).
How were the lending laws changed?
On January 1, 2025, the laws that govern the maximum allowable rate of interest charged on a loan were changed, dropping the top rate down from 48% to 35% (2). This new lending rate cap was the most significant change to laws that govern interest rates in more than 40 years. Now, under Section 347 of the Criminal Code, it is illegal for regulated lenders to charge more than 35% annual percentage rate (APR) on most personal loans. The APR takes into consideration both the interest rate and fees.
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The previous ceiling for maximum rate, set in 1980, was 60% effective annual rate (roughly equivalent to 48% APR).
Keep in mind, though, that this criminal code update only applies to the interest rates charged by regulated lenders — and some types of loans are exempt. For instance, payday lenders are exempt from the cap; however, a new federal rule now limits what payday lenders can charge — with a maximum cost of $14 for every $100 borrowed (3). That figure sounds modest, but on a two-week loan, it works out to an effective annual rate well above 300%. Also, pawn loans under $1,000 can continue to charge up to 48% APR, while commercial loans to corporations above $500,000 face no cap at all.
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Who is most at risk? (Guess what? It might be your neighbour!)
For individual Canadians with imperfect credit, however, the new 35% ceiling is the central issue.
The change was meant to protect vulnerable Canadians from predatory lenders. But that joint report, from the Ontario Association of Chiefs of Police (OACP) and the Canadian Lenders Association (CLA), examined how the change impacted borrowers. Quite surprisingly, the report authors found that the lower interest rate cap may be producing the opposite effect — cutting millions of non-prime Canadians off from regulated credit entirely and leaving them exposed to illegal lenders operating beyond Canadian law (4).
"The legislation has the potential to create a vacuum for criminals to fill," explained Barry Horrobin, co-chair of the OACP's Community Safety and Crime Prevention Committee, in a statement (5).
Not every Canadian is affected equally. The OACP and CLA report estimates that approximately 4.7 million Canadians — representing about 16% of those with active credit files — could lose access to regulated credit as a result of the cap. These are non-prime borrowers: Canadians with lower credit scores who are already ineligible for bank loans or credit from regulated lenders.
This group often includes new immigrants, students, and individuals with limited credit history — people who rely on regulated installment loans as a vital tool for building credit and eventually qualifying for better rates (6).
Under a new 35% APR interest rate cap, many of these borrowers will no longer be financially viable for regulated lenders to serve — because lenders use risk-based pricing where higher default risks necessitate higher interest rates to offset potential losses. The 35% ceiling effectively locks out those whose scores are less-than-ideal for prime lenders.
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This shift impacts a significant portion of the population. According to a Pollara study cited by the Canadian Lenders Association (CLA), 35% of non-prime borrowers are middle-class Canadians earning between $50,000 and $100,000 per year (7). This is not a fringe group; it is a substantial segment of the workforce.
Reduced max lending rate means less competition
When a regulated lender can no longer earn a sufficient return on a higher-risk loan, they stop offering loans to this segment of people — and according to the CLA and OACP joint reports, this is a predictable outcome.
Report authors drew on case studies from three other markets that implemented similar lending rate caps.
In California, a 36% rate cap was introduced in 2019 for non-installment loans between US$2,500 to US$10,000. According to the CLA/OACP report, this contributed to the “collapse” of the state-regulated loan market, pushing borrowers toward unregulated options at rates as high as 950%. While the impact cited by CLA/OACP analysts is unverified, the broader credit-access concern has legitimate academic support.
In Quebec, where a provincial cap pushed lenders out, an online market for high-interest microloans emerged — with many providers operating internationally and well above the legal limit. In the United Kingdom, restricted access to regulated credit coincided with a documented spike in illegal moneylending (8).
The pattern is consistent: When regulated credit disappears, demand does not.
Read more: The ultra-rich are bailing on volatile stocks right now — these 4 shockproof assets are their new safe havens
Police warn: Expect a rise in illegal lending
As a result of the report, police are now issuing a blanket warning: Watch out for illegal lenders.
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Illegal lenders operate outside Canadian law. They are often connected to organized crime, can target victims and borrowers who fall behind and have little recourse.
The OACP report cites evidence from a U.K. study showing that loan sharks now use social media to falsely advertise — claiming the loans and services as safe and legitimate — then terrorize victims with implied and real threats.
The survey data behind this concern is startling even if not supported by independent studies. According to a Pollara study — which was commissioned by the CLA and is not independently peer-reviewed — close to 3 in 10 Canadians who borrowed from alternative non-prime lenders last year — and nearly half of those who used payday lenders — have thought about going to an illegal loan shark (9). These are not people seeking out organized crime. They are people who need money for essential expenses and are running out of safe places to get help.
To be clear, statistics show that non-prime Canadians borrow primarily to (10):
- Pay bills (53%)
- Cover essential expenses (39%)
- Handle home and auto repairs (28%)
- Consolidate debt (24%)
If you’re struggling with high credit card debt or have outstanding payments on multiple cards, consider consolidating debt using a personal loan. Personal loans typically have a lower interest rate than credit cards and you’ll only one payment to keep track of. Use a loan consolidator, like Loans Canada, to shop for the best rates and terms.
What to do if you've been turned down for a loan?
Being refused by a regulated lender is a signal to pause — not to look harder for someone willing to say yes. To help, here is what financial experts and consumer agencies suggest instead:
Check for legitimate lender alternatives
The CLA maintains a directory of regulated lenders at canadianlenders.org. Even if your loan application gets rejected by one lender, shop around. Exhausting all regulated lenders is the safest — and often the cheapest option — when borrowing funds.
If you need a personal loan, consider comparison shopping using a loan consolidator, like Loans Canada. Consolidators help you compare and find the best rates, and you only need to fill out one application.
Understand the payday loan cost
Payday lenders remain active and are exempt from the 35% cap. But at a max cost of $14 per $100 borrowed, the costs are steep. For instance, a $1,500 loan may cost you $210 in fees if repaid within two weeks. The costs increase significantly if you stack multiple payday loans, which many borrowers end up doing.
Work with a non-profit credit counsellor
Accredited, free services are available across Canada, including through Credit Counselling Canada (creditcounsellingcanada.ca) and Consolidated Credit Canada (consolidatedcreditcanada.ca). These organizations can help map out alternatives, negotiate with creditors and, in some cases, access emergency lending programs. Yes, it takes a bit of work, but with a credible plan, using lower-cost lenders, you could eliminate the emergency loan cycle.
Report suspected illegal lenders
If an online lender is offering loans with no regulatory disclosure, no fixed address and no licensing information — treat it as a red flag. A big red flag. Report suspected illegal activity to your provincial consumer protection office or the Canadian Anti-Fraud Centre at 1-888-495-8501.
Know the law
Charging more than 35% APR on a personal loan is now a criminal offence in Canada. If a lender is soliciting you at a higher rate, they are already breaking the law — and you have limited protection if something goes wrong. Be sure of your rights and ask questions to regulators when in doubt before you agree to borrow money.
Final thoughts
The 35% rate cap may benefit Canadians with decent credit scores, as the cost of borrowing just went down for them, but for those with no or poor credit scores, the gap between regulated lender rejection and illegal lending is now much narrower. Knowing where the safe options are — before you need them — is the best financial defence.
Article sources
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
A Rise in Illegal Lending and Criminal Activity (1, 4, 7, 8); McMillan LLP (2, 3); Government of Canada's Interest Cap Risks Criminal Surge (5); Canadian Lenders Association (6, 9, 10)
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Romana King is the Senior Editor at Money.ca. She writes for various publications, and her book -- House Poor No More: 9 Steps That Grow the Value of Your Home and Net Worth -- continues to be an Amazon bestseller. Since its publication in November 2021, this book has won five awards, including the New York CPA Society's Excellence in Financial Journalism (EFJ) Book Award in 2022.
