The interest rate cap has led to unintended consequences, with an illegal lending market in Canada quietly expanding at an annual interest rate of 1800%.

Ask AI · How interest-rate caps unexpectedly fuel a black market of high-interest loans?

Canada’s regulatory move to lower the maximum legal interest rate to 35% is giving rise to an expanding underground lending black market, where the effective annualized rates sometimes reach as high as 1800%, along with aggressive collections tactics such as harassment and threats.

Data from Credit Counselling Society, a Canadian nonprofit credit counseling organization, shows that last year, the use of unlicensed lenders for small, short-term borrowing across the country rose 60% year over year, and borrowers who used these loans carried substantially higher debt burdens than other groups. Data from the Canadian Lenders Association shows that in the first ten months after the interest-rate cap was implemented, as many as 2.2 million people nationwide may have lost access to credit as a result.

This situation is highly relevant to current U.S. policy discussions. Trump has proposed setting a credit card interest-rate cap at 10%, and JPMorgan Chase CEO Jamie Dimon warned that this would force banks to cut the credit limits of millions of Americans and would cause an “economic disaster.” Canada’s experience indicates that interest-rate regulation may protect some consumers while also pushing the most vulnerable borrowers into regulatory gaps.

Borrower traps: Two months and debts to 22 unlicensed lenders

The experience of Ottawa resident Laura Pelletier is a snapshot of the unintended consequences of this regulatory change.

According to a report by Bloomberg, 47-year-old Pelletier borrowed from 22 unlicensed online lenders over two months to cover rehabilitation expenses after her brother suffered a serious motorcycle accident while away from home. She initially borrowed about 12.6k Canadian dollars (about $9,100 USD), but the debt ultimately rolled up to nearly 21k Canadian dollars. One of the two-period loans had an effective annualized interest rate exceeding 1800%. Because nearly all the lenders did not obtain operating licenses in the province of Ontario where she lives, the lending costs far exceeded the regulatory cap. The debt accumulated like a snowball, eventually forcing her to file for bankruptcy.

Pelletier said that all she had to do was search online for “Ontario loans without credit checks” to find a long list of lenders that were not licensed by the province. “There was no other way for me to get funds,” she said. “That’s exactly their entry point—they know you can’t get approved anywhere else.”

The collection tactics she experienced included: unauthorized direct withdrawals from her bank account, multiple collection emails every day, threats of legal action, and threats to disclose her debt to her employer.

Black market expansion: Quebec becomes a source for unlicensed lending

The rise of Canada’s unlicensed lending black market closely matches the timeline of tightening regulation, and Quebec is an early example of this phenomenon.

Quebec set the maximum interest-rate cap at 35% as early as 2018, and later, provincial courts ruled that loan agreements exceeding the cap were not legally enforceable. According to research by the Canadian Lenders Association, the number of unlicensed lending websites targeting Quebec borrowers sharply increased between 2019 and 2021. As the federal government rolled out the same interest-rate cap nationwide, these sites began expanding to borrowers in other provinces. Last year, Calgary police filed lawsuits against unlicensed online lenders; all 10 defendants in the case came from Quebec.

The British Columbia consumer finance regulator said the province has noticed an increase in complaints about unlicensed payday loans, and after confirming that a large portion of the activity originated in Quebec, it transferred the relevant cases to local authorities for handling.

On the enforcement front, Alberta keeps some of the most detailed data among Canada’s major provinces: in 2025, the number of public reports of lenders violating consumer protection regulations rose by more than 16% year over year, while enforcement actions by provincial consumer finance regulators surged by more than 150%.

Regulatory predicament: Cross-province enforcement is difficult, and borrowers often realize too late

The expansion of the unlicensed lending market reflects structural loopholes in the current regulatory framework.

Payday lenders in Canada are regulated at the provincial level, but the internet allows lenders to reach borrowers in provinces without local licenses easily, while also making local regulators’ enforcement and prosecution more difficult. Peta Wales, CEO of the Credit Counselling Association, said borrowers typically only realize they are not dealing with a local licensed institution once problems arise.

“Once a debtor can’t repay, harassment calls, repeated automated dialing, showing up at the workplace, contacting family members, and even threats—those things come one after another,” Wales said.

Unlicensed lenders can look for customers across provinces, and because the operators’ identities are often obscured, authorities must coordinate across jurisdictions when handling complex cases, greatly increasing enforcement difficulty. Calgary police previously disclosed that a single unlicensed lending operator used an automated dialer system to place thousands of calls to borrowers every day, effectively tying up the borrowers’ mobile phones and bombarding their relatives and employers.

Policy warning: Interest-rate caps may push the most vulnerable borrowers into even more dangerous territory

Gary Schwartz, chair of the Canadian Lenders Association, characterized this phenomenon as a structural consequence of regulatory policy.

“When regulated lenders refuse to lend, demand doesn’t disappear,” Schwartz said. “It just shifts to payday loans and unlicensed online lenders.” He pointed out that because interest-rate caps make it unprofitable for the highest-risk borrowers, those people are pushed into a gray area.

This logic also applies to current U.S. policy debates. The 10% credit card interest-rate cap proposed by Trump has triggered strong pushback from the U.S. banking industry. Canada’s case shows that the real-world effects of interest-rate regulation may differ significantly from the policy’s original intent—while protecting some consumers from falling into a cycle of debt, it may also cut off the last channel through which fringe borrowers can access compliant credit, pushing them toward a black market that regulators can’t reach as easily and where risks are harder to predict.