Unconscionable Interest Rates in Canada: Criminal Code Section 347 and Your Rights

Canadian Credit Law

Unconscionable Interest Rates in Canada: Criminal Code Section 347 and Your Rights

Mar 20, 202623 min read

You borrow $500 from a payday lender to cover an emergency car repair. Two weeks later, you owe $575. That $75 fee might not sound outrageous—until you calculate the annual interest rate. At $75 for a two-week loan of $500, you’re paying an effective annual rate of approximately 390%. Is that even legal in Canada?

The answer is complicated—and it’s changed significantly in recent years. Canada has long had a criminal interest rate provision in its Criminal Code, and recent amendments have dramatically lowered the threshold for what constitutes a criminal rate. Understanding these rules is essential for anyone who borrows money, especially Canadians with bad credit who may be targeted by predatory lenders offering fast cash at astronomical rates.

In this comprehensive guide, we’ll break down Section 347 of the Criminal Code, the new 35% effective annual rate cap, payday loan exemptions, how to recognize predatory lending, how to report it, and what court challenges have shaped the law.

The History of Criminal Interest Rates in Canada

Canada has regulated interest rates for over a century, but the framework has evolved significantly.

The Interest Act

The federal Interest Act has been in force since Confederation. It establishes basic rules about interest charges:

• Interest rates must be disclosed as annual rates (not monthly or weekly)
• If a rate isn’t specified, the legal rate is 5% per year
• For mortgages, the interest rate must be calculated at least semi-annually (not in advance)
• The Interest Act doesn’t set a maximum rate—that’s the Criminal Code’s job

Section 347: The Criminal Rate

Section 347 of the Criminal Code was introduced in 1980 to address loan sharking. The original provision made it a criminal offence to enter into an agreement or arrangement to receive interest at a criminal rate—defined as an effective annual rate exceeding 60%.

The 60% threshold was set deliberately high. Parliament intended to catch genuine loan sharks while leaving room for legitimate commercial lending, including higher-risk lending to borrowers with poor credit. The provision was primarily targeted at organized crime operations that charged usurious rates enforced through violence or intimidation.

The 2024 Amendment: Lowering the Rate to 35%

In 2023, the federal government passed legislation to lower the criminal interest rate from 60% to 35% effective annual rate. This change, which took effect on January 1, 2025, represented the most significant reform to Canada’s criminal interest rate provision in over four decades.

The key changes include:

• New criminal rate threshold: The effective annual rate above which interest charges become criminal was lowered from 60% to 35%
• Broader definition of “interest”: The definition was clarified to ensure all fees, charges, and costs associated with borrowing are included in the rate calculation
• Increased penalties: Maximum penalties for criminal interest offences were increased
• Transition period: Existing lending agreements entered into before the effective date were given a transition period to come into compliance

Understanding “Effective Annual Rate”

One of the most important concepts in criminal interest rate law is the effective annual rate (EAR). This is not the same as the stated interest rate—it includes all costs associated with borrowing.

What’s Included in the Criminal Rate Calculation

Section 347 defines “interest” very broadly. It includes not just the stated interest rate but also:

• All fees and charges: Application fees, origination fees, processing fees, administrative fees
• Insurance premiums: If you’re required to purchase insurance as a condition of the loan
• Brokerage fees: Fees charged by a mortgage or loan broker
• Penalties: Prepayment penalties or late payment charges (in some interpretations)
• Service charges: Monthly service fees, annual fees, or account maintenance charges
• Any other consideration: Essentially, anything of value that the borrower must pay in connection with the loan

What’s NOT Included

• Default interest and penalties: Additional charges that apply only if the borrower defaults are generally excluded (though this is debated)
• Charges for optional services: Fees for services that the borrower voluntarily chooses (not required by the lender)
• Government fees: Charges like land registration fees that are paid to government bodies, not the lender

How to Calculate the Effective Annual Rate

The EAR takes into account the compounding effect of interest and all fees. Here’s how to think about it:

The Payday Loan Exemption

The most significant exception to Section 347 is the payday loan exemption. In 2007, the federal government amended the Criminal Code to allow provinces to regulate payday lending separately—effectively exempting provincially licensed payday lenders from the criminal interest rate provision.

How the Exemption Works

Under Section 347.1 of the Criminal Code, a payday loan is exempt from the criminal rate provisions if:

• The loan is for $1,500 or less
• The loan term is 62 days or less
• The lender is licensed under the applicable provincial payday lending legislation
• The province has enacted legislation that designates specific provisions to regulate payday lending

If all four conditions are met, the payday lender can charge rates that would otherwise be criminal—sometimes hundreds of percent in effective annual terms.

Provincial Payday Loan Rate Caps

While payday loans are exempt from the federal criminal rate, each province sets its own maximum cost of borrowing for payday loans:

The Payday Loan Debate

The payday loan exemption is one of the most controversial aspects of Canadian consumer lending law. Arguments on both sides include:

Arguments for Allowing Payday Loans

• They provide credit access to people who can’t get traditional loans
• The high rates reflect the high default risk and short loan terms
• Banning payday loans would push borrowers toward even worse alternatives (loan sharks, illegal lenders)
• Borrowers make informed choices and should have the freedom to borrow

Arguments Against Payday Loans

• Effective annual rates of 300-400% are inherently predatory
• Borrowers often become trapped in cycles of repeat borrowing
• Payday loans disproportionately affect vulnerable populations—Indigenous Canadians, single parents, low-income workers, and people with bad credit
• Many borrowers don’t fully understand the true cost of the loans
• Quebec has demonstrated that payday lending can be effectively prohibited without the dire consequences predicted by the industry

The New 35% Cap: What It Means for Different Types of Lending

The reduction of the criminal rate from 60% to 35% has significant implications across the lending industry. Let’s examine how it affects different types of credit:

Credit Cards

Most major credit cards in Canada charge between 19.99% and 25.99% annual interest. Even with annual fees factored in, these rates typically fall well below the 35% threshold. However, some store-branded credit cards and subprime credit cards have charged rates near or above 30%. With fees included, some of these products may now be close to the 35% limit.

Subprime Personal Loans

This is where the impact is most significant. Before the amendment, lenders serving borrowers with bad credit could charge up to 59.99% (just under the old 60% criminal rate). Many installment loan companies targeted borrowers with credit scores below 600, charging 39.99%-49.99% annual interest plus fees.

These lenders have had to fundamentally restructure their business models. Options include:

• Lowering rates to comply with the 35% cap
• Reducing or eliminating fees that contribute to the effective annual rate
• Tightening credit criteria (meaning fewer bad-credit borrowers get approved)
• Exiting the market entirely

Private Mortgages

Private mortgage lenders—who serve borrowers who can’t qualify with traditional lenders—typically charge between 8% and 18% interest. However, when broker fees, lender fees, and other charges are added, the effective annual rate can climb significantly. For short-term private mortgages (6-12 months) with high upfront fees, the 35% threshold could potentially be breached.

Title Loans and Auto Equity Loans

These products—where you borrow against the equity in your vehicle—have historically charged very high effective annual rates. Many title loan products will need to be restructured to comply with the new 35% cap.

Recognizing Predatory Lending

Whether or not a loan technically falls under the criminal rate, predatory lending practices are harmful and should be avoided. Here are warning signs:

Red Flags of Predatory Lending

1. Red Flag 1: The lender won’t disclose the total cost of borrowing or the effective annual rate upfront. Legitimate lenders are required to provide clear disclosure—if they’re evasive about costs, walk away.



2. Red Flag 2: The lender pressures you to borrow more than you need or to add on insurance or other products. These add-ons increase the effective cost and are often unnecessary.



3. Red Flag 3: The loan terms are confusing or overly complex, making it difficult to understand what you’ll actually pay. Complexity is often used to hide high costs.



4. Red Flag 4: The lender doesn’t assess your ability to repay. Responsible lenders ensure you can afford the payments. Lenders who don’t care about your ability to repay are counting on trapping you in a debt cycle.



5. Red Flag 5: The loan includes a “rollover” feature that automatically extends the loan (with additional fees) if you can’t pay in full by the due date. This is a classic debt trap mechanism.



6. Red Flag 6: The lender requires access to your bank account for automatic withdrawals. While pre-authorized payments are common, giving a lender full access to your bank account creates the risk of overdrafts and unauthorized withdrawals.



7. Red Flag 7: The lender is not licensed in your province. All lenders, including online lenders, must be licensed in the province where the borrower resides. An unlicensed lender operating in Canada is illegal.

How to Report Illegal Interest Rates

If you believe a lender is charging interest above the criminal rate, you have several options for reporting and seeking recourse.

Reporting to Law Enforcement

Since charging a criminal rate of interest is a criminal offence, you can report it to:

• Local police: File a complaint with your local police service
• RCMP: For cases involving organized crime or interpersonal operations
• Provincial law enforcement agencies: Such as the OPP in Ontario or the Sûreté du Québec

Be aware that law enforcement may not pursue every complaint. Criminal interest rate cases can be complex, and police prioritize cases involving the most egregious conduct or the most victims.

Reporting to Provincial Consumer Protection Authorities

Each province has a consumer protection authority that oversees lending practices:

Civil Action

In addition to criminal reporting, you can pursue civil remedies:

• Small Claims Court: For amounts within the small claims limit, you can sue the lender to recover excess interest paid
• Superior Court: For larger claims, you may need to file in superior court (likely with a lawyer)
• Class action: If many borrowers are affected by the same predatory practice, a class action lawsuit may be possible

Court Challenges and Key Cases

Canadian courts have shaped the interpretation of Section 347 through several important decisions.

Garland v. Consumers’ Gas (Supreme Court of Canada, 2004)

In this landmark case, the Supreme Court of Canada addressed whether late payment penalties charged by a utility company constituted criminal interest. The Court held that:

• The definition of “interest” in Section 347 is deliberately broad
• It includes all charges and expenses, whether direct or indirect, that are paid or payable for the advancing of credit
• Courts should look at the substance of the arrangement, not just its form

This case established that Section 347 applies beyond traditional lending—any arrangement that involves an advance of credit and charges for that credit must comply with the criminal rate.

Transport North American Express Inc. v. New Solutions Financial Corporation (2004)

The Supreme Court addressed the remedy when a criminal interest rate is found. The Court held that:

• A loan agreement that violates Section 347 is not automatically void
• Courts have discretion to sever the criminal portion (the excess interest) while enforcing the remainder of the agreement
• The borrower may be required to repay the principal and interest at a legal rate, even though the agreed rate was criminal

This means that if you’ve borrowed money at a criminal rate, you don’t get a “free” loan—you’re still obligated to repay the principal and a legal amount of interest.

Degelder Construction Co. v. Dancorp Developments Ltd. (1998)

This BC Court of Appeal case addressed how fees and charges are factored into the criminal rate calculation. The court confirmed that brokerage fees, arrangement fees, and other charges paid in connection with a loan must be included in the interest calculation for Section 347 purposes.

Recent Cases Under the New 35% Threshold

As the new 35% threshold is relatively recent (effective January 1, 2025), significant case law is still developing. Early cases are expected to address:

• How the transition period applies to existing agreements
• Whether certain fee structures that were designed to comply with the 60% threshold now violate the 35% threshold
• The application of the new threshold to novel lending products (buy-now-pay-later, embedded finance)

Your Rights as a Borrower

Canadian law provides several protections for borrowers beyond the criminal interest rate provision:

Federal Protections

• Cost of borrowing disclosure: Lenders must disclose the annual interest rate and total cost of borrowing before you sign
• Cooling-off period: For certain types of loans, you have a short period after signing to cancel without penalty
• Prepayment rights: For many types of loans, you have the right to prepay without penalty (though this doesn’t apply to all loans)
• Responsible lending: While Canada doesn’t have a comprehensive responsible lending framework like some other countries, various regulations require lenders to assess your ability to repay

Provincial Consumer Protection

Provincial consumer protection legislation adds additional layers of protection:

• Unfair practices provisions: Most provinces prohibit unfair, deceptive, or unconscionable business practices in lending
• Disclosure requirements: Provincial laws often have more detailed disclosure requirements than federal law
• Payday loan specific regulations: Each province has specific rules about payday loan terms, rollovers, and collection practices
• High-cost credit provisions: Some provinces (like Manitoba with its “high-cost credit” legislation) have additional regulations for loans above certain interest thresholds

Alternatives to High-Interest Lending

If you have bad credit and need to borrow money, there are alternatives to predatory high-interest lenders:

Credit Union Lending

Credit unions often have more flexible lending criteria than big banks and charge reasonable interest rates. Many credit unions offer specific programs for members with bad credit, including:

• Credit-builder loans (small loans designed to help you build credit)
• Secured personal loans (backed by a savings deposit)
• Financial counselling and budgeting support

Not-for-Profit Lending Programs

Several Canadian organizations offer fair lending alternatives:

• Momentum (Calgary): Offers fair and fast loans as an alternative to payday lending
• Causeway Work Centre: Provides micro-loans and financial literacy programs
• Various community development financial institutions (CDFIs): These organizations provide affordable credit to underserved communities

Government Programs

• Canada Emergency Business Account (CEBA) successors: For small business owners
• Provincial social assistance emergency funds: Some provinces offer emergency funds for recipients of social assistance
• Community social services: Emergency funds for rent, utilities, and food from community organizations

Buy Now, Pay Later (BNPL) and the Criminal Rate

A newer area of concern is Buy Now, Pay Later services—platforms like Afterpay, Klarna, PayBright (now Affirm), and Sezzle that let you split purchases into installments. While many BNPL services charge no interest for on-time payments, late fees and extended payment plans can create effective interest rates that may approach the criminal threshold.

How BNPL Products Work

The typical BNPL model:

• You make a purchase and split the payment into 4 installments over 6-8 weeks
• If you pay on time, there’s no interest or fees
• If you miss a payment, late fees apply (though some BNPL providers have eliminated late fees)
• Some BNPL providers also offer longer-term financing options that do charge interest

BNPL and Section 347

The question of whether BNPL products constitute “credit” for the purposes of Section 347 is still being debated. If they are classified as credit arrangements, late fees would need to be included in the effective annual rate calculation. Given the small amounts and short terms involved, even modest late fees can translate to very high effective annual rates.

As of early 2026, Canadian regulators are actively studying BNPL products and considering how to regulate them. Borrowers should be cautious and always pay BNPL installments on time to avoid any charges.

Penalties for Charging Criminal Interest

The penalties for violating Section 347 are severe:

Criminal Penalties

• Indictable offence: Maximum imprisonment of 5 years
• Summary conviction: Maximum fine of $25,000 and/or imprisonment for up to 2 years less a day

Civil Consequences

• Excess interest is recoverable: You can sue to recover any interest paid above the legal limit
• Agreement may be unenforceable: A court may refuse to enforce all or part of a loan agreement that violates Section 347
• Class action potential: If many borrowers are affected, class action lawsuits can result in significant damages

Regulatory Consequences

• Lenders may lose their provincial licences
• Provincial consumer protection authorities may issue compliance orders
• Public enforcement actions serve as deterrents for the broader industry

What to Do If You’re in a High-Interest Loan

If you currently have a loan that you believe may exceed the criminal interest rate, here are your options:

1. Step 1: Calculate the effective annual rate. Include all fees, charges, and costs—not just the stated interest rate. Online calculators can help, or consult a financial counsellor.



2. Step 2: Determine whether the rate exceeds the applicable threshold. For agreements entered into before January 1, 2025, the threshold is 60%. For agreements entered into after that date, the threshold is 35%.



3. Step 3: If the rate is criminal, contact the lender in writing. State that you believe the effective annual rate exceeds the criminal rate under Section 347 of the Criminal Code. Request that the terms be modified to comply with the law.



4. Step 4: If the lender doesn’t respond or refuses to modify the terms, contact your provincial consumer protection authority and file a complaint.



5. Step 5: Consult a lawyer or your provincial legal aid clinic. Many offer free consultations for consumer protection issues. A lawyer can advise on whether you have grounds for a civil claim to recover excess interest.



6. Step 6: Consider filing a police report if the conduct is egregious (extremely high rates, threats, or targeting of vulnerable people).



7. Step 7: Continue making payments on the principal while the dispute is being resolved. Even if the interest rate is criminal, you still owe the principal amount you borrowed.

Unconscionability Beyond Section 347

Even if an interest rate doesn’t technically exceed the criminal rate, it can still be challenged as unconscionable under provincial consumer protection legislation or under the common law doctrine of unconscionability.

The Legal Test for Unconscionability

A contract or contract term may be unconscionable if:

• There is inequality of bargaining power between the parties (the borrower was in a position of vulnerability)
• The terms are substantially unfair or one-sided
• The stronger party knowingly exploited the weaker party’s vulnerability

Courts have found loan agreements unconscionable even when the interest rate was below the criminal threshold—particularly when the borrower was elderly, had limited education, was in financial distress, or didn’t understand the terms.

Provincial Consumer Protection Approaches

Several provinces have specific provisions addressing unconscionable lending:

• Ontario: The Consumer Protection Act, 2002 prohibits “unconscionable consumer representations” and allows courts to set aside or modify unconscionable agreements
• British Columbia: The Business Practices and Consumer Protection Act addresses unconscionable acts and practices
• Alberta: The Fair Trading Act includes provisions against unfair practices, including unconscionable contract terms
• Manitoba: Has specific “high-cost credit” legislation that regulates loans above 32% annual interest—going beyond the federal criminal rate

Frequently Asked Questions

Final Thoughts: Know Your Rights, Protect Your Finances

Canada’s criminal interest rate provisions exist to protect you from exploitation. The recent reduction from 60% to 35% significantly strengthens that protection—but it only helps if you know about it. As a borrower, especially one dealing with credit challenges, you are more likely to encounter predatory lending practices. Knowledge is your best defence.

Before you sign any loan agreement, take these steps:

1. Ask for the total cost of borrowing expressed as an effective annual rate, including all fees and charges
2. Compare offers from multiple lenders—including credit unions and not-for-profit lenders
3. Read the fine print—every fee, charge, and condition
4. Check that the lender is licensed in your province
5. Walk away from any offer that seems too expensive or too good to be true
6. Seek free advice from a credit counsellor, legal aid clinic, or your provincial consumer protection office

Your credit situation may limit your options today, but it won’t forever. Every responsible borrowing decision you make—at a fair interest rate, with manageable payments—is a step toward rebuilding your credit and your financial future. Don’t let predatory lenders set you back.