Interest Rates

Interest rate is the rate (expressed as a percentage of the loan amount), at which the lender charges the borrower for lending them money. For example if a consumer with bad credit applies for a secured credit card, the lender decides what interest rate to charge the borrower for giving him credit through the credit card. Most of the time interest rates are expressed as yearly interest rate, popularly known as APR (annual percentage rate). For example if a consumer applies for an auto loan, the bank will do a credit check and depending on the credit score of the customer, will decide what interest rate to offer. If the customer has a perfect credit record, the bank might consider offering very low interest rate on the loan, because the borrower represents a low risk. The opposite is also true, and if somebody applying for a loan has really bad credit, the bank may either offer very high interest rate or flat-out refuse to give the loan. In this case the borrower might be forced to work with subprime lenders.

How it Works?

In contemporary economy, Interest Rates are usually regulated by governments and large centralized banks. Most of these Interest Rates are calculated over a period of one year. Depending on financial conditions, the rate of interest changes with time. Usually, Interest Rates are announced after taking into consideration such factors as unemployment, inflation and amount loan, etc. There are fixed and variable Interest Rates. As the name implies, fix Interest Rates remain fixed for the duration of interest while variable Interest Rates may change.

To better understand why people charge Interest Rates, it should be understood that money does not generally have enough buying power in future. A $1 bill today may be enough to buy a can of Soda, but it may not be enough ten years later. It is because prices of goods generally keep on rising. Therefore, lenders need to charge Interest Rate to counter future price increases. Similarly, someone lending $10000 needs to compensate for future value of that currency. After five years, even if the borrower gives back $10000, does not necessarily mean that $10000 will have enough buying power that it had five years, earlier.


In order to get a similar value, lenders usually estimate the future buying power of a currency, and charge Interest Rates, accordingly. For example, if a lender thinks that in five years $10000 will have value equal to $12000 then they may charge 4% every year because 4% of $10000 is $400, which after five years will accumulate $2000 additional money for lender. Thus, adding $2000 Interest to $10000 becomes $12000.

How much are the Interest Rates?

As stated, Interest Rates keep on changing depending on market conditions. Between 1954 and 2008, Federal Reserve Bank of United States has changed Interest Rates from 0.25% to 19% while Bank of England has charged anywhere from 0.50% to 15%, since 1989. In contrast, German government had to charge 90% Interest Rate, in 1920.

Bank of Canada

The Bank of Canada is responsible for setting short-term interest rates, which in turn affect the interest rate offered by Canadian commercial banks to their customers. When short-term interest rates rise, it's getting more expensive to borrow, and when they go down, it's cheaper to borrow.

Currently, Interest Rate from Bank of Canada is at all-time low of 0.50 percent which once was 21.03 percent, in August 1981. It should be noticed that inflation is the main contributing factor to Interest Rates. Therefore Interest Rates, in 1981, were record high because the annual rate of inflation had reached as high as 12.5 percent per year. Subsequently, recent Interest Rates from Bank of Canada reflect a low rate of inflation which has averaged only 2%, since 1991.