The Bank of Canada’s recent interest rate hike increased to 1.25 per cent. Do you know how your personal loan rates and car loan interest rates will change? You might not be impacted by the interest rate hike depending on the type of loan you have.
You’ve probably heard the news about the Bank of Canada’s recent interest rate hike. Up from 1 per cent since September, the Bank of Canada recently increased the interest rate to 1.25 per cent. According to the Bank of Canada, the interest rate happened because Canada’s inflation – the rate at which the general level of prices for goods and services rise and the purchasing power of currency falls - hit target. Increased interest rates occur to help keep the economy running smoothly, however considering this is the bank’s third hike since July 2017, Canadians are feeling the impact of higher borrowing rates, specifically for loans that have variable-rate financing.
Interest rate is the amount of money you pay lenders to borrow money. Whenever the interest rate rises or falls, loan payments with variable interest rates fluctuate. Loan agreements with variable-rate financing change based on bank’s prime rates.
Since the Bank of Canada’s recent interest hike, five of Canada’s biggest banks increased their prime lending rates from 3.2 per cent to 3.45 per cent. Signing a personal loan, line of credit or mortgage with a variable-rate means that any increase or decrease in interest will impact your cost of borrowing. Long-term, variable-rate loans are likely to be impacted by interest rate hikes because of the lifespan.
Luckily, not all loans have variable-rate financing. Auto loans in Canada have fixed rates, which means monthly payments don’t increase if interest rates rise. With fixed-rate financing, loan payments stay the same throughout the entire term. However, if a fixed-rate loan is renewed or renegotiated, monthly payments could increase if interest rates change. Like an auto loan, any credit card with a fixed-rate will not increase unless you choose to pay more than the minimum each month. If you’re unable to pay the minimum, your lender can increase the amount of interest that you pay as much as 5 per cent.
Typically, banks and financial institutions will notify borrowers if interest rates change. Not all loans are impacted when there is an interest rate hike, but if you have both variable and fixed-rate lines of credit, your monthly payments could increase a small percentage. When an interest rate hike happens, it’s a good idea to talk to your lenders and financial institution to see how much your monthly payments will change. If your finances have taken a hit from increased interest rates, look at how you can reduce expenses or see if there are options available for earning extra cash – anything to help stay on track with monthly payments is worth it for your savings account and your credit score.
These five tips can help you stay on track financially during an interest rate hike:
- Cut expenses to save for monthly loan payments
- Snowball debt by paying off loans with high interest rates first
- Find ways to increase income
- Have an emergency fund set up to help with monthly payments
- Consider consolidating your debts
If you can’t afford payments on your variable-rate loans, you might want to consider consolidating your debt. Debt consolidation can help Canadians with multiple lines of credit consolidate their debt onto one line of credit. A debt consolidation loan is an allowance from a financial institution that is equivalent to a person’s unsecured debt. Consolidation loans typically have lower interest rates compared to most loans. To learn more about how you can consolidate your debt, click here.
Thankfully, the Bank of Canada’s recent interest rate hike won’t affect your current fixed-rate loans. However, it’s always a good idea to be financially prepared for interest rate fluctuations, no matter what loans you have.