How Interest Rates Work

When you take out a loan or line of credit, most financial institutions will charge interest in return for lending you the money. In general, here are the factors that will determine the interest rate on your loan:

• The current Prime Rate. Each bank sets its own Prime Rate; however, this is usually based on the rate set by the Bank of Canada.
• The type of loan and whether you put up collateral. For example, the interest rate on a home equity line of credit (where you use your home as collateral) would be lower than the interest rate on an unsecured loan.
• The term of your loan. This is the period of time for which the interest rate on the loan is guaranteed and may also be the length of time that it takes you to repay the loan (amortization).
• Your credit rating. Generally, borrowers with a good credit rating get better rates than borrowers with a weak credit rating.
• Other economic factors can also affect interest rates in general.

How Can You Qualify for a Low Interest Rate?

Even a small difference in your interest rate can have a big impact on the amount you will pay for your loan. Here are some tips on qualifying for lower interest rates:

• Build and maintain a good credit rating history by making your payments on time.
• Consider using one lender—if you have multiple accounts with a lender, you could receive a lower interest rate in recognition of your relationship with them.
• Choose a secured loan, where you put up some type of collateral. For example, borrowing against the equity in your home or using non-registered investments—such as GICs, government bonds or stocks—as collateral.