You might’ve heard that the Bank of Canada increased or decreased its rate — and that it could impact the cost of financial products like personal loans. But how it affects your loans depends on the type of interest rate you have and whether or not you’ve already applied for financing.
How does the Bank of Canada rate affect personal loans?
A Bank of Canada (BoC) policy interest rate change directly affects the interest rates banks charge on all new personal loans and some current personal loans. Banks and other financial institutions set their prime lending rate based on the BoC policy rate. How your current loans will be affected by changes in the BoC rate depends on what type of interest rate you have.
How does the Bank of Canada policy rate affect variable-rate loans?
Changes in the BoC policy rate affect both new and current variable-rate loans. With new loans, an increase or decrease means you’ll start off paying either higher or lower rates than you would have before.
But since variable-rate loans fluctuate based on the lending market, a change in the BoC rate will also cause interest rates on your current loan to go up or down.
How does the Bank of Canada rate affect fixed-rate loans?
Changes in the BoC rate only affect new fixed-rate loans. An increase in the policy rate typically means banks and other lenders will increase their fixed rates. Similarly, a decrease in the policy rate generally sees a decrease in interest rates banks charge.
Since fixed rates stay the same over the life of the loan, any changes to the BoC rate after you sign your loan documents have no affect on your current loan.
The Bank of Canada rate, also known as the policy interest rate, is the benchmark rate the Bank of Canada uses to lend banks money. To understand the BoC rate, you first need to understand how the BoC works.
The Bank of Canada is Canada’s central bank. It’s responsible for keeping the economy stable by controlling inflation and encouraging employment. One of the ways it influences the economy is through the rates it charges when it lends to banks.
As a benchmark rate, the policy rate is the lowest rate it charges when it makes loans to banks. When the BoC lowers rates, banks can afford to charge lower rates. When the BoC increases rates, banks also increase interest rates.
Why does the Bank of Canada rate change?
The Bank of Canada changes interest rates mainly to maintain a stable economy. So if the economy is doing well, BoC rates typically increase to prevent inflation. When the economy is doing poorly, the BoC lowers rates. The Bank of Canada announces whether or not it will raise rates on eight pre-determined dates per year.
What’s the current Bank of Canada rate?
The current BoC policy interest rate is 0.25%, as of July 28, 2020.
What happens when the Bank of Canada changes rates?
When the Bank of Canada changes its policy interest rate, interest rates on new and variable-rate financial products change. That’s because banks must charge a higher interest rate than the policy rate to make a profit, so when the BoC changes its interest rates, so do banks.
For example, if the BoC of increases the policy rate, your bank will increase the interest it charges on new fixed rate and current variable rate personal loans. So a change in the BoC rate directly impacts the interest rates you pay to your bank.
Compare personal loans
How else can a Bank of Canada rate increase impact me?
The Bank of Canada rate doesn’t just have an impact on personal loans — it affects most financial products that come with an interest rate or yield rate. Here’s how:
Credit cards. While most credit cards come with fixed rates, which are not impacted BoC rate changes, you may come across some that offer a variable rate.
Mortgages. Variable-rate mortgages and new mortgages can see an increase or decrease in interest rates along with the BoC rate. Current fixed-rate mortgages are unaffected.
Car loans. Variable-rate and new auto loans also go up or down with the BoC policy rate, but current fixed-rate car loans stay even.
Student loans. Student loan rates are also directly affected by the BoC rate, including variable-rate and new fixed-rate private student loans.
If you already have a personal loan, the Bank of Canada rate might not have any impact on how much you pay in interest. However, if you’re thinking of getting a new loan or currently have a variable-rate loan, trends in the BoC policy rate could be worth paying attention to.
There is no one interest rate on personal loans — it depends on your creditworthiness and lender. However, loans that come with variable rates rely on benchmark prime rates, which tend to fluctuate based on the BoC rate.
The simplest way to lower the interest rate on your personal loan is to refinance. This involves taking out a new loan with more favorable rates and terms to pay off your current loan. You might be able to qualify for a lower rate if you have a higher credit score or lower debt-to-income ratio than you did when you first took out the loan.
It depends on the type of loan you’re applying for and your credit rating. Typically, personal loan providers offer rates starting at around 10% or 12% APR. However, you’ll need excellent credit and a high income to qualify for that or lower rates.
Anna Serio is a trusted lending expert and certified Commercial Loan Officer who's published more than 950 articles on Finder to help Americans strengthen their financial literacy. A former editor of a newspaper in Beirut, Anna writes about personal, student, business and car loans. Today, digital publications like Business Insider, CNBC and the Simple Dollar feature her professional commentary, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.
How likely would you be to recommend finder to a friend or colleague?
Very UnlikelyExtremely Likely
Thank you for your feedback.
Our goal is to create the best possible product, and your thoughts, ideas and suggestions play a major role in helping us identify opportunities to improve.
finder.com is an independent comparison platform and information service that aims to provide you with the tools you need to make better decisions. While we are independent, the offers that appear on this site are from companies from which finder.com receives compensation. We may receive compensation from our partners for placement of their products or services. We may also receive compensation if you click on certain links posted on our site. While compensation arrangements may affect the order, position or placement of product information, it doesn't influence our assessment of those products. Please don't interpret the order in which products appear on our Site as any endorsement or recommendation from us. finder.com compares a wide range of products, providers and services but we don't provide information on all available products, providers or services. Please appreciate that there may be other options available to you than the products, providers or services covered by our service.