In Canada, there are a number of regulations which
encourage transparency by lenders when it comes to disclosing the
cost of borrowing. Such regulations are intended to balance any
real or perceived inequities between savvy financial institutions
and borrowers. This article explores Section 4 of the Interest
Act (Canada)2 ("Section 4") and describes
how lenders can protect themselves from inadvertently taking a
"haircut" on pricing.
An unhappy borrower can use Section 4 to attack (and ultimately
lower) interest rates set forth in a written agreement.3
Section 4 provides that if interest in a written agreement (a loan
agreement, for example) is calculated in any manner other than on a
per year basis (i.e. "X% per month" or "Y% per 360
days"), then the equivalent annual rate must also be expressly
stated. If this rule is not complied with, a borrower can apply to
a court to have interest capped at a maximum of 5% per
annum.
