What is an Unlawful Interest Charge?
An Interest Clause Must Be Established When a Contract is Formed. Without Advance Agreement, Adding Interest Afterward is Improper. Additionally, Interest Must Be Shown as an Annual Rate and Be Less than Sixty (60%) Percent.
A Helpful Guide on How to Determine Whether An Interest Charge Is Legal and Enforceable
When a business imposes an interest charge by adding the interest charge on an invoice without previous discussion and agreement regarding the potential interest charge, this unilateral, meaning single-sided, decision is improper, contrary to basic principles of contract law, and is therefore unenforceable. Simply stated, an interest charge is invalid unless the customer agreed when the deal was made that an interest charge may arise for late payment of an account. This was said very clearly within the case of King Road Paving and Landscaping Inc. v. Plati, 2017 ONSC 557 at paragraphs 79 to 88.
What Happens If An Interest Rate Is Shown Only As a Monthly Rate Rather Than Annualized Rate?
If An Interest Rate Is Shown Without An Annualized Rate, Then the Interest Charge Becomes Void.
For most contracts involving the sale of goods and services (i.e. other than mortgages) where an interest rate is stated as applying to late payment or overdue accounts will require that the annual interest rate be shown. The mandate to show an annual interest rate is found in s.4 of the federal Interest Act, R.S.C. 1985, c. I-15. In circumstances where an interest rate that is less than annual is shown, such as a two (2%) percent monthly interest charge, without also stating the annual interest rate, such an agreement is void and unenforceable.
The Interest Act also governs the interest rate that applies if an agreement for interest is made but the rate of interest undeclared. In such a situation, the Interest Act statutorily establishes a five (5%) annual rate. Counter-intuitively, many perceive that where a lesser rate is stated without the annualized rate such as the example of two (2%) percent mentioned above, this unenforceable rate should be substituted with the statutory five (5%) percent rate; however, the law will not operate in such a manner as to amend or adjust the defective rate of interest stated in the contract. The law within the Interest Act only establishes the rate at five (5%) percent when interest was agreed to but the rate unstated. Accordingly, in a situation where a rate is stated without the annualized interest rate, any interest becomes disallowed.
What Is the Highest Allowable Interest Rate?
Charging Sixty (60%) Percent Interest or More Is Illegal.
Even if stated properly shown as an annual interest rate, when an interest charged calculates to sixty (60%) percent or beyond is contrary to s.347 of the Criminal Code of Canada, R.S.C. 1985, c. C-46 and is illegal. As an illegal interest charge, and where such is contrary to the Criminal Code, persons charging such exorbitant may be punished with up to five (5) years in jail when a charge is prosecuted as an indictable offence or six (6) months imprisonment and/or twenty five thousand ($25,000) dollar fine when prosecuted as a summary conviction offence.
Furthermore, fees and other sums charged by pay day loan businesses are also regulated whereas such fees are often interest charges in disguise and such interest charges in 'disguise' may amount to criminal activity if calculations show a rate beyond beyond the maximum allowed. These payday or short-term loan businesses are regulated per the Payday Loans Act, 2008, S.O. 2008, Chapter 9. The decision in the case of The Director v. The Cash Store, 2014 ONSC 980 has helped define some of the restrictions.
Attempts to add an interest charge onto an invoice without first having first arranged an agreement to charge interest is improper and unenforceable. Furthermore, an interest clause must show the agreed upon interest rate as an annual rate, or include an annualized rate if a monthly rate is shown, and the annualized rate must be less than sixty (60%) percent.