Non-prime borrowers pay higher interest rates because they are higher risks. Cap legal interest rates and many won't get loans at all

Ottawa has set its sights on reining in predatory lending rates. Last year it set out draft regulations that would lower the rate non-prime lenders can charge from 48 to 35 per cent (“annual percentage rate” or APR). Will that keep people who are prey to predatory lending from entering a cycle of debt? Probably not.

There are two types of borrowers, prime and non-prime. Prime borrowers have strong credit scores that give banks and credit unions confidence they will pay their loans on time and in full. As a result, they can borrow at reasonable interest rates. Non-prime borrowers are more diverse. Some have a checkered repayment history. Others, including immigrants, have no Canadian credit history. Because banks and credit unions often won’t lend to them, they have to seek credit elsewhere. To offset the higher risks involved lenders in these alternative markets charge higher interest rates. Higher rates for riskier loans will strike most people as common sense.

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Until last year’s budget, and with only a few exceptions, the most a lender could legally charge was 48 per cent. The decision to set a legal maximum interest rate suggests governments believe that a) rates can rise above........

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