Interest Charges in Ontario
When you set out to borrow money, you need to consider the interest rate that will be charged.
Since you are working with someone else’s money, they have the right to charge you an amount for the privilege.
The higher the risk, they greater the amount the lender will charge.
Different types of loans have different risk values, as well as the personal credit rating of the individual or company seeing the loan.
The Criminal Code of Canada has established the maximum rate of interest.
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It is a percentage of the amount of the amount you borrowed (principal).
The maximum allowable annualized interest rate is capped at 60%.
Any person or entity that charges over that amount is guilty of a criminal offense called usury and can be prosecuted in court.
There is a major exception and we will cover that later in this article.
Typical Interest Rates
As mentioned, different types of loans have different (sometimes very different) rates of interest.
Bank of Canada
– The lowest rate available is called the “overnight” rate.
This is the interest rate charged by a bank to another financial institution that will borrow the money for one day or overnight.
The bank can set its own rate and it can change without notice.
Most individuals do not qualify for this rate but it is a good marker to see where you fall in the spectrum.
Mortgages
– Mortgages are secured by real property, a house or office building.
Since it is a viable asset that can be repossessed and resold if the borrower fails to repay, these are considered low risk and are favourable rates.
They also vary by the length of the loan (term) and by the credit rating of the borrower (ability to repay).
The best rates are between 3 and 5%.
Secured personal loans and lines of credit
– This is similar to a mortgage but the asset used as collateral is something like a vehicle or a savings account.
These rates run about 6 to 10%.
Unsecured loans
– This is sometimes called a personal loan and the only security the lender has is the credit history and reputation of the borrower.
Banks will issue these loans occasionally and the rates are around 7 to 12%.
Credit Cards
If the charges placed on a credit card are not paid in full by the due date, the company can charge interest on the unpaid balance.
The rate of interest can vary based on the individual’s credit score, the company issuing the card, and other factors like travel miles, etc.
These interest rates can range from 10% to almost 30%.
Finance Company
This is a company (not a bank) that uses its own resources to fund the loans.
These can be personal or business loans, but the money comes from the company itself or its parent organization.
These interest rates go from just under 22% to the maximum allowable of 59.99%.
Exception
Payday loans are the exception to the Criminal Code of Canada that governs the maximum amount of interest that can be charged.
Each province has been allowed to set its own regulations governing payday loans.
The Ontario the limit is $15 per $100 that is borrowed for a two-week period.
That calculates out to 390% in an annual interest rate, plus $15 in fees.
But wait, that’s not all.
Payday loans can also include default charges, so that rate climbs every time the loan is not paid in full.
A payday loan is sometimes called a cash advance or check advance loan.
It is based on a post-dated check or future payment of some kind.
Obviously payday lenders are taking advantage of those least able to afford the interest rate and fees charged.
However, many people feel that this is their only option.
If you are feeling overwhelmed by the interest charges you pay and would like some information about relief from this burden, locate a financial advisor who can help you decide the best course of action.
This should be an independent counsellor not associated with any financial lending operation.
If there is anything our company can do to help answer your questions, please feel free to contact us.
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