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Published November 15, 2022

Personal Loan Rates in Canada: How to Calculate

Personal loan interest rates can be either fixed or variable. Your rate depends on factors like your income, credit score, term, type of loan and more.

Personal loan interest rates in Canada depend on factors such as your credit score, term, the amount borrowed, and whether or not you get a secured or unsecured loan.

Personal loan rates in Canada

In Canada, loan interest rates can be either fixed — stay the same during the loan’s term or variable — fluctuate over the course of the term.

Interest rates determine how much you end up paying overall for your loan. Your interest rate could make the difference between saving hundreds of dollars over the course of your loan — or paying it.

How are personal loan rates calculated?

Personal loan rate calculations rely on several elements that include:

Bank of Canada policy rate

The Bank of Canada plays a major role in influencing Canada’s economy. It enacts its monetary policy by setting the overnight rate, also known as the policy interest rate. The overnight rate is the rate at which financial institutions borrow money from one another, and set their own prime rates on.

To address rising inflation, the Bank of Canada increases its overnight rate. The banks, in turn, raise their prime rates to recoup the added cost of borrowing. Higher interest rates make it more expensive to borrow money so people are more inclined to save rather than spend their money. As people spend less, inflation begins to slow.

If the Bank of Canada believes the economy is too sluggish, it will lower its policy interest rate to encourage more borrowing and spending.

Bank lending rate

Each bank’s lending rate, also known as its prime rate, is based on the Bank of Canada’s overnight rate. However, the overnight rate is one of the elements that impacts a bank’s rate for personal loans.

While prime rates affect variable-rate loans and mortgages, the Canadian bond market typically influences a financial institution’s fixed rates. When the central bank’s interest rate rises, the bond prices go up, subsequently dropping the bonds’ value and causing banks to lose money.

Banks then pass this loss on to their customers in the form of a higher fixed interest rate.

Other factors

Aside from external elements like the regional and international economy, inflation and other market forces,  banks also have some flexibility to alter their personal loan rates based on the borrower’s credit profile and loan needs.

This table illustrates how much a $5000 personal loan would cost you in total assuming you pay monthly installments for the following fixed interest rates over the period of six to sixty months:

Total potential cost of a $5,000 personal loan using different terms and interest rates

 8% Fixed Interest20% Fixed Interest40% Fixed Interest
1 Year$5,219.28$5,558.04$6,148.32
2 Years$5,427.36$6,107.52$7,342.56
3 Years$5,640.48$6,689.52$8,659.80
4 Years$5,858.88$7,303.20$10,091.04
5 Years$6,082.80$7,948.20$11,625.60

These interest rates and calculations are basic examples and don’t consider variable rates or potential fees, such as insurance or origination fee charged by the lender in the individual personal loan agreement.

Factors that affect your personal loan interest rates

Lenders set a borrower’s individual loan rate after considering a variety of factors that include:

  • Income. Your income is one of the biggest predictors of whether or not you’ll likely manage to make regular payments and eventually pay off a loan.
  • Credit score. The higher your score, the more likely a lender will see you as creditworthy and offer you a favourable rate.
  • Loan amount and term. A lender’s rates may vary based on the size of your loan and the amount of time you’ll take to pay back the funds.
  • Unsecured vs. secured loan. Generally, you’ll get a lower rate with a secured loan because providing collateral ensures the lender takes on less financial risk.

Type of personal loans

Secured loans

Secured loans require you to provide an asset, such as a home or car as collateral  — a guarantee against non-payment of the loan. Though you can get better rates and a larger fund with a secured loan, the risk is much higher if you default on your payments because you could lose your asset.

Unsecured loans

The most common kind of personal loan in Canada is an unsecured loan, which means you don’t need to offer collateral. While faster to get than a secured loan, unsecured loans tend to have higher interest rates.

Individual loans

If you have trouble getting a loan from a traditional lender like a bank, you could consider asking to borrow money from a friend or family member. Because you’re borrowing from an individual, you can discuss and agree on an interest rate that works for you both.

However, if you fail to repay the loan or fall behind on payments, it could cause friction in your relationship.

Cosigned loans

A cosigned loan may be an option for people who would struggle to qualify for a loan on their own due to little credit history or a poor credit score. With a cosigned loan, a close friend or family member signs the loan with you and becomes legally responsible for repaying the loan if you default on any payments.

If the cosigner presumably has a better credit score, you may get a better rate than you would on your own.

Types of personal loan rates in Canada

Fixed rates

With a fixed rate, you’ll pay the same rate of interest on your loan for the length of your term. That means that your loan payments won’t change and remain predictable through the loan’s term. Even if the lender’s prime rate changes, your rate of interest will not rise or fall.

Fixed rates may be ideal for borrowers who don’t like surprises and who want the security of knowing exactly how much the loan will cost them.

Variable rates

A variable rate, tied to the lender’s prime rate makes your loan payments less predictable and can change through the loan’s term. The uncertainty due to the fluctuating rates can be nerve-racking.

However, if interest rates drop or stay low, a variable-rate loan may end up costing less overall than a fixed-rate loan for the same amount. In that case, a variable rate can mean significant savings over the course of a loan. But, if interest rates rise during the term, a variable-rate loan could end up costing you more than anticipated.

Types of personal loan lenders

Banks and credit unions

If you prefer to borrow from a well-established financial institution and prefer in person transactions, banks and credit unions can be good options. They usually offer both secured and unsecured personal loans at fixed or variable rates. Banks and credit unions tend to have reasonable rates, but may only lend to clients with solid credit scores.

Online platforms

You can find a wide range of loans available from individual online lenders and online brokers, though their rates tend to be higher than traditional banks and credit unions. Generally, online-only lenders are private lenders with no affiliation with a major bank or credit union, but not always. For example, the low/no-fee, online-only bank Simplii, which is the digital banking division of CIBC, offers personal loans with competitive rates.

Private and alternative lenders

Private lenders, those not connected to a bank or credit union, may be more willing to offer loans to borrowers with a history of bad credit, though they may charge higher interest rates.

Fees for personal loans

A personal loan involves taking up several extra costs beyond accruing interest. Make sure you’re aware of these additional fees hiding in the fine print of your loan contract. It’s worth noting that banks tend to charge no or fewer fees than alternative lenders.

  • Origination fee. Some lenders charge upwards of 8% of your loan to process your application, hence, also known as processing fee. It’s best to avoid lenders who charge this fee when possible.
  • Loan insurance. This type of insurance will cover you in the event you become unable to make your loan payments due to illness or loss of employment. It’s illegal for a lender to automatically add this insurance, which typically comes with extra cost, without your permission.
  • Yearly maintenance fee. Lenders charge a maintenance fee, especially if the loan repayment is over a long period of time. Some lenders may be willing to reduce or forgo this fee entirely with a bit of negotiation.

Frequently asked questions

What is the interest rate on personal loans in Canada?

The rate for personal loans is approximately 8.00%. However, your loan rate could be lower if you provide collateral with a secured loan or much higher, as much as 40% or more if you have bad credit and need to go with an alternative lender.

How does my credit score affect my interest rate?

The higher your credit score, the better interest rates you’ll typically get. Lenders perceive borrowers with higher credit scores as more creditworthy, and less likely to default on the loan. Inversely, borrowers with low credit scores will receive higher interest rates to compensate for the higher risk the lender takes if they default.

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