Prime Rate Interest Canada – Explained
Refers to the interest rate those banks in Canada charge borrowers that have good credit ratings. This article explains everything you need to know about prime interest rate in Canada.It discusses how it works, and the precautions you need to take while taking a loan.
First, let’s start with the subject of a rate of interest itself. Interest rate is the charge per unit which a bank or lender charges a borrower the amount of money lent. This rate is expressed as a percentage of the total money lent. Therefore, if you borrow $100 from a bank at a rate of 11%, the interest you need to pay for the “term” in question is 11% of $100, or $11.
In order to understand the word “term,” given above it is necessary to first define another concept called “amortization”. This is the total length of time that you will be allowed to pay off your loan. When calculating amortization, it is assumed that you will make all payments on time, so the rate of interest will not change, and that you will make no extra payments.
Amortization consists of a number of small time periods within which payment is made. Each of these time periods are referred to as a “term”. It is the period of time for which you pay a particular rate. In Canada, terms can be as short as just 3 months to as long as 25 years. At the end of the term, the rate of interest you need to pay is renewed to match the current market rates.
For instance, a lender may state that a loan is being provided at 10% interest, compounded semi-annually and not in advance. This means that interest will be calculated twice a year (semi-annually). When “compounded,” interest will be added on to the principal owing. Of course, if you have already made some repayments, these will be subtracted from the total amount you owe.
As interest is charged for a certain time period, it makes sense that payment is only collected at the end of the period. Compounding is also only done at the end of a period. This is what the term “not in advance,” refers to. You may think of it as the opposite of how rent works, where rent for a given month is usually paid in advance.
The interest rate is higher for longer terms. This is because interest only gets compounded at the end of a term, so longer terms imply less compounding. Likewise, shorter terms feature lower rates because interest gets compounded more frequently.
Some lenders offer what appear to be better (lower) rates than their competitors. However, they may just be advertising an interest rate compounded monthly. This may not necessarily work out to be cheaper. In fact, it may even prove to be more expensive!
For example, a rate of 11.7% with monthly compounding is actually the same as 12% when compounded semi-annually. To make it simpler for borrowers to make a fair comparison of the rates offered by different lenders all financial institutions in Canada are mandated by law to indicate the “equivalent”’ semi-annual interest rate.
Prime rate interest Canada refers to the rates offered by banks in the country. If a person applies for a loan, the bank checks the credit history of the person. Based on their credit score, the bank decides the rate to offer the borrower. A very good credit record will generally get you a low rate of interest on your loan, because you represent a low risk. A poor credit rating, on the other hand, leads to higher rates, since there is a bigger risk involved in lending. Very bad credit score holders may be refused loans completely, in which case subprime lenders may be the only option.
However, subprime lenders charge very high interest rates. Their rates are not linked to prime rate interest Canada. It is recommended that you avoid borrowing from such lenders, as they can be exorbitantly expensive. Keep them only as a last resort.
Prime Rate Interest Canada is linked to the key overnight lending rate declared by the Bank of Canada. The Bank of Canada is the Central Banking authority of the country. Created in 1934, the Bank of Canada is the only issuer of bank notes in Canada.
The Governor of the Central Bank is appointed for 7-year period. This is a position decided by the Bank’s Board of Directors. The Governor can’t be removed from office by the Government of Canada. This makes the country’s central bank an autonomous organization.
Among its many responsibilities, one important duty of the Central Bank is setting the prime rate interest Canada. The rates set by the Central Bank affect the interest rate offered by Canadian commercial banks to their customers. There isn’t just one fixed rate across the country. Rates vary from bank to bank, but not by a huge margin.
So if there isn’t one fixed rate at every bank, what’s the point of having prime rate interest Canada, you may wonder. Its primary purpose is to serve as a reference, in relation to which rates for personal credit are calculated. The interest on floating rate loan products such as credit cards and home mortgages depends on the prime rate.
This is typically structured as a fixed percentage added to the prime. For instance, a bank may specify that a certain person’s credit card rate is prime rate + 2%. Obviously, when the rates go down, it is cheaper to borrow, and more expensive when they go up. Prime rate interest Canada is always marked higher than the rate set by the official Central Bank.
As you might have gathered by now, mortgages, loans and rates are vast subjects and involve many complexities. This is why it is important that you make sure you understand all the nuances and fine print of any mortgage or loan you take on, before signing the dotted line.
This can be particularly difficult, especially since you have to balance all this complicated information and tedious paperwork with your hectic work life. A good mortgage agent would be a great help. For a reasonable fee, an agent will make sure that you get the lowest rates and the cheapest mortgage.
The agent will also take care of all the paperwork, and educate you about all the hidden costs and fees. This is something that most banks do not carry out because of which many borrowers find themselves confronted with hidden charges they didn’t know about at the time of borrowing.
In conclusion, the prime rate interest Canada is the factor that determines the final rate charged on all personal credit and floating rate products. The Central Bank usually lowers this rate in order to encourage spending and prevent recession. Conversely, rates are also increased when the demand increases. A good mortgage agent or broker will help you find the best deals and the lowest rates.