Overview of Consumer Protection in Canada Series – Permitted default charges

Permitted default charges

Default charges are charges that are imposed on a borrower by a lender when the borrower does not make payment when due or does not comply with any other obligation under the credit agreement. A lender cannot charge a consumer default charges under a credit agreement other than interest and:

  • reasonable legal fees in connection with enforcement of the agreement;
  • reasonable costs in connection with realizing or protecting the lender’s security interest under the agreement; and
  • reasonable charges in connection with dishonoured payments e.g. a payment returned due to insufficient funds in the borrower’s account.

Default interest charges are allowed provided that the charges do not constitute a penalty. Penalties are not enforceable. Default interest may be at a higher interest rate, except when the debt is secured by a mortgage of real property.

 

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