Clay Jarvis
Sandra MacGregor
Siddhi Bagwe
Personal loan interest rates in Canada vary widely. Depending on the lender and your financial situation, you might be offered a rate in the single digits or one that doubles the rate charged by most credit cards.
The interest rate on your personal loan affects how much you’ll end up paying overall. A difference of a few percentage points could reduce — or increase — the overall cost by hundreds or thousands of dollars.
That’s why it’s important to know how personal loan rates work. Doing so can help you land a better deal the next time you need to borrow some cash.
Factors that affect personal loan interest rates
Lenders set a borrower’s individual interest rate after considering a variety of factors, including:
- 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 credit 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.
How are Canadian personal loan rates calculated?
Personal loan interest rates are generally determined through a combination of the following factors.
Banks’ and lenders’ prime rates
The prime rate is the interest rate a lender offers its preferred customers and is the basis for most variable-rate personal loans. Variable personal loan rates are typically expressed as “prime rate plus X%.”
The Bank of Canada’s overnight rate
The Bank of Canada’s overnight rate is used to set banks’ prime rates, the interest rate at which financial institutions lend money to one another. When inflation is high, the Bank of Canada typically increases the overnight rate, which increases the cost of intra-bank lending. Banks compensate for the added expense by increasing their prime rates.
Activity in the bond market
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, causing banks to lose money.
Lender preferences
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 instalments 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 Interest | 20% Fixed Interest | 40% 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 fees charged by the lender in the individual personal loan agreement.
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Which lenders offer the best personal loan rates?
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.
Personal loan fees
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, also known as the 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.
Types of personal loan interest 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.
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.
Frequently asked questions about personal loan interest rates
The interest rate charged on personal loans is approximately 9.00%. However, your rate could be lower if you provide collateral with a secured loan, or much higher — 40% or more — if you have bad credit and need to go with an alternative lender.
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.
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