Some Ontario consumers could be caught in a never-ending cycle of borrowing from payday loan companies despite a new cap on loan fees and interest that came into effect Tuesday, warns an Ottawa-based public watchdog.

Starting Tuesday, payday loan firms in Ontario will be able to charge no more than $21 for every $100 borrowed, a rate the Public Interest Advocacy Centre said is still "astronomically high."

"It's more the big businesses that have been protected," said John Lawford, a spokesman for the advocacy group.

"[The rate is] astronomically higher than [that of] a bank or credit card company. It's not even in the same league," he said.

Prior to legislation, payday loan companies were charging interest of about $21 per $100 but added on processing fees as well as deferral fees when a client asked for more time to repay.

In 2006, a B.C. judge ruled that processing and deferral fees actually counted as interest, which brought the effective annual interest rate to above $60 per $100, an amount that is considered illegal under Canada's criminal code.

Since then, provinces across Canada have worked to regulate the industry and bring in limits on effective annual interest rates.

Ontario's new limit of $21 per $100 includes interest and all fees.

The payday loan industry has pointed out that payday loans by their very nature are short term, most lasting about 10 days. Comparing short-term interest rates with annual interest rates is like pointing out that a $200 hotel room would cost over $70,000 a year, they say.

The Canadian Payday Loan Association has said the average payday loan is approximately $280 and the average length of the loan is 10 days.

But Lawford said most of the $2 billion a year borrowed from Canadian payday loan companies is done so by repeat customers who can't get ahead of their debts.

The Payday Loan Association has welcomed Ontario's regulation, saying the new maximum rate will help protect consumers and get unscrupulous players out of the business.

The association defended the interest rates.

"What justifies him [Lawford] saying the rate is too high?" asked association spokesman Stan Keyes. "If he has any kind of evidence to justify that statement, please bring it forward."

Earlier this month, Saskatchewan became the fifth province to announce it would regulate payday loan companies. The new rules will set the maximum cost of borrowing in Saskatchewan at $23 per $100.

British Columbia, Alberta, and Nova Scotia have also passed legislation that limits borrowing rates, and Prince Edward Island is considering it. Limits are also in place in Manitoba and Quebec.

Manitoba allows companies to charge a maximum of $17 per $100 borrowed, B.C. allows the charges of $23 while Nova Scotia's maximum is $31 for every $100 borrowed.

More than two million Canadians have used payday loans to cover small-sum, short-term emergency and unexpected expenses, the industry association said.

With files from The Canadian Press