What Are Interest Rates? (Canada)

What are Interest Rates?

When you borrow money from a bank or another financial institution, an interest rate is assessed as a percentage of the overall amount and is added to your regular payments. Interest rates are a major way that financial institutions like banks make money. The bank gives you cash up front, and you pay it back with an additional percentage added on.

Similarly, if you place your money in a bank account, you will receive an interest rate back. The rate you receive for placing your money in the bank is typically much lower than the rate you owe when you borrow money though.

Let’s look at a real-world example:

If you purchase a car and take out an auto loan, your interest rate will be assigned based on how risky the bank thinks you are as a borrower. If you have defaulted on loans in the past, have poor credit, or simply don’t have credit and haven’t taken a loan in the past, you can expect a higher interest rate. These can range up to 20%. On the other hand, if you have a high credit score and a history of paying off loans in a timely fashion, your interest rate will be much lower. These can range as low as 3%. So if you are taking a loan for $10,000 to buy a car and you have a 20% interest rate, you will end up paying $12,000 in the end. If your rate is 3% though, you’ll only pay $10,300. You can use an annual interest rate calculator online to see what your total increase in payments will be.

What is the prime rate?

The prime rate is the lowest interest rate available to customers and other institutions. It changes regularly and is assessed by banks based on the fed interest rate. This rarely goes lower than 3%, except in times of financial crisis.

When the economy is doing well, federal banks tend to raise the prime rate, and they lower it when the economy is struggling. The idea is that individuals and businesses can access more credit when the rate is lower even though their finances are more stretched, allowing them to put the funds back into the economy and get business moving again.

How has COVID-19 affected Canada’s prime rate?

Canada’s central bank lowered its prime rate to 1.75% at the beginning of March, and then to 0.25% later in the month. The bank has said they hope this will help cushion the economy and allow businesses and individuals to bounce back more quickly after the current global pandemic has passed. This decision came as oil prices continued to plummet, which has further hurt the economy. This is only the second time that Canada’s interest rate cut has lowered the prime rate to nearly 0.

Where to find interest rates

You can find bank’s interest rates by googling them or going to their websites. Here are a few of the most popular banks in Canada and where to find their interest rates.

Now that you know about Interest Rates.. Learn about Spot Rates