Canadians need a new Interest Act.
Copyright 2003 Different Products Ltd.
An Act Respecting Interest, also known as "Canada Interest Act" was written over 100 years ago. The act is inadequate, confusing and written in legalese. Needless to say the act is out of date and irrelevant to average Canadians. Canadians need an easy to understand Interest Act. Because of our close proximity to the USA, their terminology is creeping into our financial vernacular and confusing Canadians. This new interest act would make it mandatory for all lenders of money in Canada to comply, regardless of their origin of business or legal status. The new Interest Act would have detailed mathematical examples of each point made, for clarity. This new act would eliminate costly court challenges, for example, regarding the meaning of "semi-annual compounding, not in advance" and/or the Gale Date method. A Lender is a lender is a lender, no exceptions. Anyone who lends money must comply, plain and simple. Amortization mathematics is one discipline that is not ambiguous and it does lend itself to exact results. The Interest Act should not be a swamp of legalese but rather a clear mathematical foundation for lending money. Ideally, the new act could also be an integral part of every high school math curriculum in Canada. Someone needed to state the obvious and Ron Cirotto has appeared before the Federal governments Standing Committee on Finance in November of 1996 and advocated these changes. It is time for these meaningful changes to be acted upon.
This new Interest Act would address the following points:
Amortization Schedules: An amortization schedule should be provided by any lender to a borrower, immediately upon signing a loan agreement. This is so obvious it gives new meaning to the words, "common sense".
Effective Interest Rates (EIR): Effective interest rates should be quoted on the top of every page of an amortization schedule in addition to the nominal interest rate (aka annual interest rate). All loans and mortgages (a mortgage is a specific type of loan) would display the EIR to at least 4 decimal places. Amortization schedules based upon the 360 day year and the 365 day year both have their proper place, however the EIR is not the same even though the initial nominal interest rate quoted is identical. The effective interest rate could replace the nominal interest rate completely and eliminate confusion regarding the "type of compounding". The effective interest rate is a number that stands on its own merit and is independent of the type of compounding. The only variable that effects the effective interest rate is the number of days in the year, that is "360" or 365.
Mortgage Renewal "Penalties": would be calculated in a uniform, consistent manner such as the Interest Rate Differential (IRD) method which would fairly compensate the lender and the borrower.
Interest Adjustment calculations: (shifting of money advance dates) would be performed in the same manner by all lenders. The interest adjustment calculation must be calculated in the same manner as the body of the mortgage.
Using the method of Internal Rate of Return all mortgage plans that allowed unusual payment schedules would disclose the impact on the effective interest rate. For example, declining interest rate plans would be easy to compare to standard mortgages if the effective interest rate was quoted.
Credit Card Interest Calculations: Standardize credit card interest calculations throughout the country! Make it simple and make credit card companies charge interest for the exact number of days you are using their money, nothing more nothing less.
Lease Calculations: Full disclosure of interest costs would be standardized throughout the country. Banning the use of the Rule of 78 would be one of the obvious changes. The Rule of 78 is biased in favour of the lender if the borrower/person buys out the lease prematurely.
Late payment charges: Consistent treatment of late payment charges across the entire country would be refreshing. When any business charges a late payment "fee" that is clearly greater than the 60% criminal interest act, .. nail them with a significant fine. Playing with words such as "late fee" is just more fuel for keeping the courts clogged with litigation. It is simple mathematics to calculate a late fee or late penalty as a percentage of the original charge. Just because it is called a "late fee" instead of an interest charge is just a play on words. If any company needs a late payment fees greater than 60% they are criminals in my opinion. Show all late payment charges as percentages and the customer will soon figure out who are the gougers.
In this new Interest Act, Financial terminology would be standardized and explained in simple, concise English with detailed mathematical examples, not just words. This approach would ensure that Canadian courts are not clogged with litigation concerning semantics. 2 + 2 = 4 leaves no doubt in any Canadians mind.
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