The cost of borrowing money is represented by the interest rate. To put it another way, interest is calculated as a percentage of the total loaned amount (the principal amount). The Bank of Canada helps the Canadian government oversee the economy by fixing the bank rate and regulating the amount of money in circulation.

What is interest on credit and loans?

Interest is the amount paid for borrowed money. The principal balance is not affected by interest payments in any way. Interest is generally compounded. When calculating the total amount of money owing, an interest rate must be agreed upon. For instance, a monthly interest rate of 3% on a $100 loan means that at the end of the repayment period, the debtor will owe 3% of the outstanding debt sum. If the borrower still owes $100 after the first payment period, they will owe the lender $103. 

Credit is a pre-approved loan between a borrower and a lender. The lender gives the borrower something of value, and in exchange, the borrower agrees to provide that value back to the lender at a specific time in the future. In most credit relationships, interest encourages the lender to lend and the borrower to repay. A revolving credit card can be repaid in a single lump sum or monthly installments, depending on the terms of the credit agreement.

Similarly, a loan is an agreement between two parties in which one party, the lender, agrees to provide the other party, the borrower, with money, property, or anything else of value. A loan agreement usually includes the borrower’s repayment period and the lender’s interest rate.

Interest Charges in Ontario

It’s important to think about the interest rate associated with a loan before taking one out. A fee must be paid because the money is being borrowed from someone else for your use. The larger the risk, the higher the interest rate the lender will demand. The percentage of what you borrowed is charged (principal). The yearly rate of interest cannot exceed sixty percent, which is the highest that is permitted.

Usury is a criminal violation, and anyone charging more than that is subject to legal action.

• Overnight lending rates charged by the Bank of Canada are normally the lowest.
• Mortgages are considered to carry a low level of risk because they are secured by the borrower’s property. Rates for the “best” eligible customers are in the range of 3–5%, depending on the period.
• The interest rate for unsecured personal loans and credit lines will normally range between 6% and 10% of the loan amount.
• Banks charge between 7% and 12% for unsecured loans and personal lines of credit.
• Credit card interest rates range from 10% to 29.99%.
• The average overdraft fee for a major bank is 21%.
• The interest rates on loans offered by financial companies range anywhere from 21.99% to 31.99%, in addition to any administrative fees and levies.
• The interest rates for fast cash installment loans range from 6% to 59.99%.
• In Ontario, payday loan companies are now limited to a maximum of $15 for every $100 borrowed over two weeks. There is a 390 percent yearly growth rate.

The Exception

The Criminal Code of Canada has a rule about how much interest can be charged, but there is an exception for payday loans. Payday loans are regulated differently in each province. The Ontario maximum is $15 for every $100 borrowed for two weeks. That comes out to a rate of interest of 390% each year, in addition to the $15 in fees. There is also the possibility of incurring default charges with a payday loan, which causes the interest rate to increase if the loan is not repaid in full.

When interest rates spike, what should I do?

Right now is the time to establish a strategy for dealing with your debts before the interest rates on your loans grow too high for you to manage. In a rising-rate market, you should minimize debt and shift it to lower-rate loans. By taking the following steps, you can minimize the effect that rising interest rates have on your monthly budget:

1. Create a list of all of your obligations, including how much money you owe, the interest rate that is currently being charged, and the type of loan you have (variable rate, fixed, mortgage, credit card).
2. Prioritize paying off debt with high-interest rates. Even if the interest rate on your line of credit is going to go up, say from 2.45% to 2.70%, it is still in your best advantage to pay down your credit card debt first. If you are paying 29% on your credit card bills, you will save money in the long run by doing so.
3. If you don’t have any loans with extremely high-interest rates, your next step should be to pay down any variable rate debt you have so you may avoid further increases in the cost of borrowing money.
4. Consider moving from a variable-rate mortgage to one with a fixed interest rate to ensure that your monthly payments will be predictable. Don’t forget to take into account any fees or penalties that may be incurred if you decide to refinance your mortgage. Be aware that variable-rate loans carry a higher risk when interest rates are rising.
5. If you want to pay off your mortgage faster, you might want to look into reducing your amortization term or making weekly or bi-weekly payments instead of monthly ones.
6. There are ways to minimize the burden of your debts, especially unsecured debt like credit cards, payday loans, and old student loans. Speak with a debt expert. They will explain your options to you as regards getting out of debt faster.

Final Thoughts

Payday lenders take advantage of people who are least able to pay the high-interest rates and fees. Despite this, a significant number of people have the impression that this is their only choice. Seek the advice of a financial counsellor if you’re stressed out by your monthly interest payments and would like some ideas on how to reduce this burden. EmpireOne Credit has qualified debt consultants that would help you get rid of your debts with a workable tailored solution to your current situation, giving you financial freedom.