Jeremy Kronick spends most of his time these days writing about the Bank of Canada’s battle with inflation. 

But in February, Kronick, director of the Centre on Financial and Monetary Policy at the C.D. Howe Institute, took a break from the only issue anyone cares about to consider something that seemed uncontroversial: the federal government’s crackdown on “predatory lending”—effectively, payday lenders and loan sharks. 

It turns out there was some controversy. That month, the Canadian Lenders Association—a lobby for banks and others in the business of lending money, though not payday lenders—had published research with the Ontario Association of Chiefs of Police that found some 4.7 million non-prime borrowers could be hurt by the federal government’s plan to lower the maximum legal interest rate to an annual percentage rate of 35 per cent from 47 per cent.   

Kronick was astonished by the scale of harm. The CLA and the chiefs of police had tallied the number of non-prime borrowers in Canada and compiled case studies from other jurisdictions to assert that a lower criminal interest rate would cause regulated lenders to exit the non-prime market, forcing borrowers with limited credit histories to turn to the very predatory lenders on whom the government was trying to crack down. 

“I don’t remember who it was that forwarded me the combination of the CLA work that they had done, that had this four-million-person number that was going to potentially be affected by this, which felt crazy to me,” Kronick said in an interview. “Then you look at the government’s cost-benefit analysis, and they come up with 93,000, and you’re like, ‘These aren’t even in the same ballpark.’ Let’s assume the number’s in the middle—it’s still a lot of people.” 

The government had flagged the measures almost a year earlier, in the 2023 budget—yet despite the CLA’s efforts to bring attention to a policy that it insisted would have all kinds of unintended consequences, few outside the fintech community had paid much attention. Kronick’s conclusions suggest this was more than a lobby group fighting a lost cause. In fact, it might be an example of how well-intentioned policymakers end up making things worse instead of better. 

“Will [a lower criminal rate] keep those prey to predatory lending from entering a cycle of debt?” Kronick asked rhetorically in his analysis. “Probably not.” 

It’s hard to mount a defence of high-interest lenders because we’ve been conditioned to see them as manifestations of evil. The literary canon is replete with stories in which the devil appears as a creditor. When Barack Obama was pushing for tighter U.S. restrictions on payday lenders in 2016, his administration invited religious leaders to the White House to highlight that they felt a “moral obligation” to stop payday lenders from “preying on consumers by trapping them in an endless cycle of debt.” 

Prime Minister Justin Trudeau joined the crusade in 2021, instructing Finance Minister Chrystia Freeland in her mandate letter to “crack down on predatory lenders by lowering the criminal rate of interest.” The government held consultations, but it had decided from the outset what was the right thing to do. 

The real world is more complicated than a morality tale. The economist Thomas Sowell describes the demonization of payday lenders as an example of how the mushy intentions of do-gooders end up making the lives of actual people worse. “Freakonomics Radio,” the podcast that journalist Stephen Dubner spun out of the bestselling books he wrote with University of Chicago economist Steven Levitt, took on the issue of payday lending in 2016 and failed to draw any definitive conclusions about the merits of rate ceilings.  

The CLA advised the federal government ahead of the 2022 budget that not all lenders that charge elevated rates are payday lenders—some are fintechs and alternative lenders who cater to “underserved Canadians,” including gig workers and influencers, it said. 

When Freeland decided to go ahead in the 2023 budget, Goeasy, one of Canada’s more prominent alternative lenders, said the lower rate would “eliminate access to credit for millions of borrowers, forcing them to turn to more expensive sources of borrowing, such as payday loans or illegal loan sources” and make it harder for such people to rebuild their credit scores. The company also predicted in a press release that the rate limit would force some lenders out of business, reducing competition and options for borrowers. 

Kronick came away from his investigation skeptical that Freeland was doing the right thing. He said the industry probably is exaggerating the potential harm, but the government’s own math raises doubt about whether there’s a problem worth fixing. The cost-benefit analysis said households would accrue about $257 million in savings over 11 years, while lenders would lose about $239 million over the same period—a net benefit of less than $2 million per year. 

That’s not a big number, especially considering the government’s estimate of harm focused only on payday lenders and excluded companies such as Goeasy. Kronick concluded that if the government wanted to help marginal borrowers, it could have forced lenders to be crystal clear in how they communicate the terms of their loans. In markets, the predators have an information advantage. If you want to defang them, you take that advantage away. 

“Obviously, I’m against predatory lending,” Kronick said. “I want to focus on how we can fix these things. But at the end of the day, anytime you’re capping interest rates, it’s a form of price control. As an economist, your back gets up a little bit when you see price controls.” 

It’s too late to make substantive changes because the new rate ceiling is now law. Of course, laws can be changed. Donald Trump watered down Obama’s restrictions on payday lenders. The CLA might be playing a longer game. 

Kevin Carmichael is The Logic’s economics columnist and editor-at-large. He has spent more than two decades covering economics, business and finance for outlets including Bloomberg News, The Globe and Mail and the Financial Post, where he also served as editor-in-chief.