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How are interest rates calculated?
HOW ARE INTEREST RATES CALCULATED?
The interest rate you’re offered when you apply for a loan is based on many related factors. Some factors are within your personal control. Others depend on external economic conditions. This infographic explains the factors that can impact interest rates. It then provides ways in
which you can build strong financial habits to help you secure the best interest rate a lender offers.
The interest rate you’re offered when you apply for a loan is based on many related factors. Some factors are within your
personal control, like your credit score or the loan solution you choose. Others depend on external conditions like inflation.
Together, the internal and external factors impact the interest rate you receive.
EMPLOYMENT
Regular employment may be a
LOAN TERM
Based on your lender, the length
INDIVIDUAL
of time you choose to repay
contributing factor in the rate
FACTORS
your loan may impact the rate
you’re offered because it
YOU
CONTROL
you’re
offered. history, the loan term you select and if you choose to
indicates
financial
stability.
First, there are individual factors affecting interest rates that are in
your control,
including
your credit score, your
employment
secure your loan.
Credit score
Your credit score is a ranking from three hundred to nine hundred that is based on your borrowing and payment history. Generally, the higher your score, the lower the rate you’re offered.
CREDIT SCORE
Employment
Your credit score is a ranking from
Regular employment may be a contributing factor in the rate you are offered because it indicates financial stability.
SECURITY
Homeownership boosts
credit-worthiness. Additionally,
securing your loan with equity
in your home may qualify you
for a lower rate.
300 to 900 that is based on your
Loan term
borrowing and payment history.
Based on your lender, the length of time you choose to repay your loan may impact the rate you are offered.
Generally, the higher your score,
Security
the lower the rate you’re offered.
Homeownership boosts credit worthiness. Additionally, securing your loan with equity in your home may qualify you for a lower rate.
ECONOMIC
FACTORS
Second, there are also economic factors affecting interest rates that are outside of your control and can impact the interest rate you are offered. These include inflation, the policy
INFLATION
DEMAND
interest rate, bank prime rates and overall demand.
Inflation is the gradual increase
People spend money when the
Inflation
in the
cost account
of goods
economy is strong. Based on
Inflation is the gradual increase in the average cost of goods
andaverage
services. Lenders
for the expected rate of inflation to protect against future losses.
and services. Lenders account
market conditions, rates may
Policy interest rate
forofthe
expected
rate
of inflation
rise or fall to meet consumer
The policy interest rate is the rate at which the Bank
Canada
lends money
to major
banks, influencing bank prime rates and, consequently, all lenders’ rates.
to protect against future losses.
and business demand.
Bank prime rate
Major banks set their prime rates based on the policy interest rate, plus additional percentages. Non-bank lenders borrow the money they lend out, and the layering of loans can impact the interest rate offered.
Demand
People spend money when the economy is strong. Based on market conditions, rates may rise or fall to meet consumer and business demand.
POLICY INTEREST RATE
The policy interest rate is the rate at which
the Bank of Canada lends money to major
banks, influencing bank prime rates and,
consequently, all lenders’ rates.
WHAT CAN I DO TO
THE
BEST
RATE?
What canGET
you do
to get
the best
rate?
KEEP CREDIT
AVAILABLE
Building strong financial
habits can rebuild or
Keep credit available
Use less than twenty five percent of available credit to show you’re able to manage credit limits.
improve credit over time
Limit credit report
andinquiries
increase lenders’ trust
Too many creditor inquiries may impact your credit score.
in you. Following these tips
Increase minimum payments
help toyou
the
best managing debt.
Pay more thancan
the minimum
showget
you are
proactively
Use less than 25%
possible rate.
LIMIT CREDIT
REPORT INQUIRIES
BANK PRIME RATE
Major banks set their prime rates based on the
policy interest rate, plus additional percentages.
Non-bank lenders borrow the money they lend
out, and the layering of loans can impact the
interest rate offered.
INCREASE MINIMUM
PAYMENTS
CONSIDER DEBT
CONSOLIDATION
Keeping credit available, limiting credit report inquiries, increasing minimum payments and considering a debt consolidation loan can help you build strong financial habits and rebuild or improve credit over time, which increases lenders’ trust in you.
of available
Consider debt consolidation
It can help rebuild credit when you are faced with multiple bills and can simplify your finances.
credit to
show you’re able to
manage credit limits
Too many creditor
inquiries may impact
your credit score
Pay more than the minimum
to show you’re proactively
managing debt
Help rebuild credit when
faced with multiple bills
and simplify your finances
A CitiFinancial Lending Specialist will work with you to find a loan solution
A CitiFinancial Lending Specialist will work with you to find a loan solution and interest rate that is right for you.
andtointerest
rate that’s right for you. Apply online at CitiFinancial.ca,
Apply online at CitiFinancial.ca, visit your local branch or call 800-995-2274
get started today.
visit your local branch or call 800-995-2274 to get started today.
©
2016
CitiFinancial.
® CitiFinancial
is a registered
Citigroup
Inc.
Used under
In Ontario,
CitiFinancial
Canada, Inc. is licensed as brokerage 10821.
© 2016
CitiFinancial.
® CitiFinancial
is a registered trademark
of Citigroup trademark
Inc. Used underof
license.
In Ontario,
CitiFinancial
Canada,license.
Inc. is licensed
as brokerage
10821.