Even if you’re not a financial wizard, there’s a good chance that you’ve heard the term “prime rate” during your financial meetings and inquiries with a trusted adviser or a family member. If you find yourself needing a financial loan and are exploring your options, prime rate is an essential factor to take into account when deciding how much money to borrow, and from where to borrow it.
What is Prime Rate in Canada?
Prime rate, or the prime lending rate, can be defined as the interest rate that commercial banks and banking institutions charge their customers that have good or above average credit. It is the baseline for annual rates of interest that banks offer consumers who are exploring variable loans and lines of credit.
In Canada, each bank sets its own prime rate, so it may differ from one institution to another. However, the prime rates of all the major Canadian banking institutions—RBC, TD, Scotiabank, BMO, and CIBC— are dependent on the overnight rate set by the Bank of Canada. This rate is a measure of how expensive it is for the Bank of Canada—and by extension of all the other banks—to borrow money at a given time. In simpler terms, the higher the overnight rate, the higher the prime rate will be for your bank. To ensure you’re getting the best rate, consider monitoring the prime rate over the course of several days before you borrow money from your financial institution.
As of today, the prime rate is currently 3.95%.
How Does Prime Rate Affect You?
Traditional lenders and banking institutions use the prime rate to determine variable interest rates for their customers. These variable interest rates are generally expressed as a certain percentage higher or lower than the prime rate.
For example, if the prime rate is currently set at 4%, and your banking institution offers you a variable interest rate of +3%, then your total interest rate would be 7% (the baseline of 4% plus 3%). It’s essential to keep in mind that if the prime rate increases from the time you’ve borrowed money, your interest rate will increase along with it.
Prime rate frequently has an influence on the following financial products:
- Lines of credit
- Personal loans
- Variable rate mortgages
- Car loans
While prime rate can have a potentially volatile effect on your variable interest rates, banking institutions may offer interest rates that are lower than their prime rate to customers that have excellent credit and are classified as low default risks. Since the prime rate is simply a benchmark, not a mandatory minimum standard, traditional lenders and banking institutions are able to occasionally offer such rates. However, loans come with interest rates that are significantly higher than the baseline more often than we realize.
Current Status of the Prime Rate in Canada
According to CBC, the Bank of Canada takes the economy into consideration when raising rates, “In determining the appropriate pace of rate increases, [the bank] will continue to take into account how the economy is adjusting to higher interest rates, given the elevated level of household debt.” The economy has recovered from the 2008 recession and was expected to continue to increase at a healthy pace.
However, since the autumn months of 2018, the overnight rate hasn’t moved from 1.75%, and it isn’t expected to change before Winter 2020. If you’re thinking of buying a home, cities with strong economic growth, like Toronto, have been experiencing large drops in activity, as well as in housing prices. At the moment, economists are predicting that the prime rate will remain unchanged for the next three years, stating that “it is likely the Canadian prime rates that are used to calculate variable and adjustable mortgage rates will stay fla[t] or drop between now and 2021.”
However, this type of prediction fluctuates unpredictably, making it difficult to know if and when the prime rates will change for the benefit or disadvantage of the lender. There is also a high amount of conflicting data, as multiple sources can be inaccurate or have contradicting facts.
Advantages of Online Lending
One of the biggest advantages of applying for a loan online is the lack of a prime rate baseline that so many traditional lenders use as a lower boundary for their interest rates. Reputable online lenders, such as Lend for All, can usually offer much better rates on loans unlike the major Canadian banking institutions.
Other advantages of opting for online lending include:
- A higher chance of acceptance. Applicants with a below average credit score are eligible candidates for a loan.
- Maximum convenience. No need to make multiple trips to the bank, and you can apply for a loan at any time.
- Much shorter wait times. Online lending ranges from a few hours to several days, whereas it can take weeks or months before you know if a major bank approved or rejected your application.
- Minimal required documentation. Fewer details are required when filling out an online loan application, ensuring a quicker and smoother process.
As an example, when you’re exploring options for a loan, you should take reputable online lenders into account for their lower interest rates, and higher levels of applicant acceptance.
At Lend for All, our team of experts can help you determine the best type of loan for your specific circumstances, and also assist you to find the lowest interest rates. You don’t even need to worry about applying with bad credit because we use an Artificial Intelligence (AI) platform that provides a higher chance of acceptance to our customers.
Instead of quickly going to a traditional lender, like your bank, and potentially paying more because of the prime rate or other factors, reach out to us to explore all the options that are available to you. If you’re ready for a loan now, apply with us, or call us toll-free at 1-800-532-4505.