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Here you will learn about interest rates and the factors that affect the variation in the rates. Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them

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Website:1: Factors affecting bank interest rates

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Website:1: Factors affecting bank interest rates

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This website explains the various effects of interest rate fluctuation on Canadians especially in the banking sector.  The website briefly explains the various factors that cause rate changes. There is rise in the rates because the bank not only wants to stabilize the housing costs and reduce levels of household debt but also wants to protect people from an economic shock. That being said, wants to provide protection from any sudden situation in the future.

We found this website very authentic and straight forward. At the end of the website, they explain that the effect of increased interest rate will not affect the principle amount. One might have to pay off the loan for a longer period of time but the main amount remains the same.

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Advertiser Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services.

Interest rates have been low for so long now that some Canadians have forgotten that rates don't only go down - they can go up, too. To put this into perspective, the interest rate on a five-year fixed rate mortgage reached a high of 21% in the second half of 1981. While we're not saying rates will skyrocket that high again, it does show the degree of fluctuation that can occur.

In the last decade interest rates bottomed out in the wake of the financial crisis. Pre-crisis rates were at 4.25% in 2008, before hitting a low of 0.25% in the spring of 2009. That's a 4% drop in a little over a year!

But times have changed, and the Canadian economy is on the mend. With the unemployment rate at a 40-year low and Canada boasting the strongest growth among all the G7 countries, the Bank of Canada has recently felt confident enough to raise interest rates again. We saw multiple rate hikes in 2017, the first time rates increased in about seven years. And we've already seen one rate hike in only the first month of 2018.

And that may not be all for this year, as many economists are predicting further increases in the months to come. So what does this mean for average Canadians like you and me? How does it affect our money? Rising and falling interest rates might seem like high-level finance talk, but it's actually pretty easy to explain.

Why does the Bank of Canada raise interest rates?

The Bank of Canada plays a very important role in the Canadian economy. It's in charge of monetary policy, which is no small burden. The bank's current goal is to keep the inflation rate between one and three percent-a low and stable rate that helps steadily grow our economy and create jobs. An economy that grows too quickly can lead to some of the pain points that many Canadians are experiencing right now: high levels of household debt-currently near a record high-and inflated housing prices-those of you who've recently considered buying a home in the GTA just let out a knowing groan, I'm sure.

By raising rates now, our central bank can not only stabilize housing costs and reduce levels of household debt, but can also better protect us from an economic shock in the future (e.g. if the price of oil and gas plummets again or if there's another global recession). Though those are welcome long-term effects of increased interest rates, the immediate aftermath of the hikes will affect different Canadians in different ways.

In a year of increasing interest rates, your calculator is your friend. See how a 2% increase in rates would affect any of your variable rate debt.

What does an increased interest rate mean for your debts?

It might take you longer to pay off your debt

An increased interest rate by the Bank of Canada will not affect those with fixed rate debts (at least until the terms of said debts come up for renewal). But the rate hike might lead to lenders increasing the prime interest rate that Canadians receive for their loans, which in turn leads to an increase in variable interest rates. Some forms of debt that might have variable rates include:

Mortgages

Lines of credit

Car loans

Student loans

Credit cards (such as the TD Emerald Flex Rate Visa Card)

Basically, when the Bank of Canada increases its interest rate, consumers with variable-rate loans end up paying more each month. Let's say you had a variable (also called an 'adjustable') rate mortgage in the amount of $400,000 amortized over 25 years. If your mortgage rate is 2.35%, then your monthly mortgage payment would be $1,762. But if the prime rate were to go up by just 0.25% (the amount of a typical interest rate hike), your mortgage rate suddenly hikes to 2.60%, and your monthly mortgage payment goes up to $1,812. It may not look like much, but it definitely adds up over time.

You might have tighter monthly cash flow

If your debt payments increase to cover the elevated interest, you'll have less wiggle room in other aspects of your budget. In the aforementioned example, you're paying an extra $50 out of your pocket each and every month over the course of 25 years. That's a cool $15K when all is said and done. And that's from only one interest rate hike! Imagine two or three of them in a single year and you get the picture of what this will cost you.

Rate hikes are particularly tough on marginal borrowers: those who barely qualified for a mortgage or loan and who borrowed at the maximum (or near maximum) interest rate they were approved for. Though I generally support and encourage Canadians who are aggressive in their pursuit of homeownership, the repeat rate hikes we're seeing should make would-be marginal borrowers think twice before signing on the dotted line, as they might now have a tough time refinancing their debt.

How to protect yourself from rising interest rates

The threat of rising interest rates isn't fun if you're carrying debt tied to prime, so here's how to hold on to more of your money in this period:

Prioritize paying down any variable rate debt

If you have both fixed rate debt and variable rate debt (tied to prime), consider making a plan to aggressively pay down your variable rate debt first. By paying down this debt more quickly, you can soften the impact of higher interest rates and pay less over time. *Caveat: if you have substantial fixed debt, such as high-interest credit card debt, it might still make sense to focus on paying that down first, depending on how much fixed rate debt you have and how high the fixed rate is.

Consider converting to fixed rates

If the possibility of ever-increasing interest rates keeps you up at night, and you're currently in the market for a loan, consider choosing loans that are tied to a fixed rather than variable rate. If you already have a variable rate mortgage or home equity line of credit, check with your lender to see if they'll let you convert to the stability of a fixed rate. Just keep in mind that you'll probably get something called the "conversion rate," which will be higher than the fixed rate given to brand new customers of that lender. Take the conversion rate that they offer you, do some number crunching, and compare the amount you'll end up paying with the conversion rate to what you'd pay with your current variable rate. Then factor in the possibility that the Bank of Canada increases interest rates by 0.5% later this year.

Similarly, if you have a variable rate credit card, now might be the time to cancel it and seek out a low-interest fixed-rate card that won't be tied to prime.

Stress test your own finances

In a year of increasing interest rates, your calculator is your friend. See how a 2% increase in rates would affect any of your variable rate debt. Although you're only technically required to do a mortgage stress test when you first qualify for a mortgage, it's still a good exercise to make sure you aren't going to run into any cash flow problems later on if and when higher rates do arrive.

Keep an eye on the news

If the U.S. decides to pull out of NAFTA, the Bank of Canada could put the brakes on any further plans for rate hikes until talks resume. Some of what 'the Donald' says may just be hot air, but if he does follow through, those with debt tied to prime will be able to rest a little easier.

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Bank of Canada Interest Rates Increase: How Does It Affect You? | Greedyrates.ca

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Advertiser Disclosure This article/post contains references to products or services from one or more of our advertisers or partners. We may receive compensation when you click on links to those products or services. Interest rates have been low for so long now that some Canadians have forgotten that rates don't only go down - they can go up, too.

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If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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If you could pass on your knowledge to a family member or friend, what do you think is the most important thing to pass on?

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There are a lot of factors that impact on interest rates. Some are in our hand and few are not controlled by us. The one piece of advice that I would like to offer is of maintaining a good credit score. If you have good credit score, you will be able to get loan at lower rate.

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Provide a real-life example of how this topic is relevant or interesting for you.

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Provide a real-life example of how this topic is relevant or interesting for you.

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One of my family member bought his new car last month and Haard is planning to buy one in the coming month. We decided to take this topic as we wanted to learn about the interest rates, the effects of it and factors that affect  fluctuation.

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What did you learn about your topic that surprised you the most ?

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What did you learn about your topic that surprised you the most ?

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Before starting the topic I thought that there are just few factors and those factors might be responsible for fluctuating interest rates. But,  after researching on this topic, we came across that there are individual factors that play an important role in increasing the rate of particular loan.

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Website: 2: Factors affecting Mortgage interest rates

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Website: 2: Factors affecting Mortgage interest rates

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In this website, the host has explained that there are 7 major factors that determine the fluctuation in interest rates. These include: 1. Credit scores, 2. Home Location, 3. Home price and loan amount, 4.Down payment, 5. Loan term, 6. Interest rate type and 7. Loan type.

The reason why we selected this website was that we were never aware about the trade-off between the points and interest rates. Points that rate offered by the lender can decrease the interest rates in exchange for an upfront fee. Secondly, lender credits can lower the closing costs in exchange for a higher interest rate.

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Your lender knows how your interest rate gets determined, and we think you should, too. Our Explore Interest Rates tool lets you plug in some of the factors that affect your interest rate. You can see what rates you might expect-and how changes in these factors may affect interest rates for different types of loans in your area.
Even saving a fraction of a percent on your interest rate can save you thousands of dollars over the life of your mortgage loan, so it definitely pays to prepare, shop around, and compare offers.

Armed with information, you can have confident conversations with lenders, ask questions, and understand your loan choices. Interest rates, just like gasoline prices, can fluctuate from day to day and from year to year. While movement in the interest rate market is outside of your control, it makes sense-just like with gasoline prices-to gain awareness about what's typical. This way, you'll have a sense of whether an interest rate quote you receive appears to be in the range of typical rates, or if you should ask more questions and continue to shop around.

Here are seven key factors that affect your interest rate that you should know

1. Credit scores

Your credit score is one factor that can affect your interest rate. In general, consumers with higher credit scores receive lower interest rates than consumers with lower credit scores. Lenders use your credit scores to predict how reliable you'll be in paying your loan. Credit scores are calculated based on the information in your credit report, which shows information about your credit history, including your loans, credit cards, and payment history.

Before you start mortgage shopping, your first step should be to check your credit, and review your credit reports for errors. If you find any errors, dispute them with the credit reporting company. An error on your credit report can lead to a lower score, which can prevent you from qualifying for better loan rates and terms. It can take some time to resolve errors on your credit reports, so check your credit early in the process.

Enter your credit score range into our Explore Interest Rates tool to get information on the rates available to you. If you don't know your credit scores, there are many ways to get it.

You can also experiment with the tool to see how you might save more on your mortgage interest rate with higher credit scores. Learn more about things you can do to raise your credit scores.

2. Home location

Many lenders offer slightly different interest rates depending on what state you live in. To get the most accurate rates using our Explore Interest Rates tool, you'll need to put in your state, and depending on your loan amount and loan type, your county as well.

If you are looking to buy in a rural area, our Explore Interest Rates tool will help you get a sense of rates available to you, but you'll want to shop around with multiple lenders, including local lenders. Different lending institutions can offer different loan products and rates. Regardless of whether you are looking to buy in a rural or urban area, talking to multiple lenders will help you understand all of the options available to you.

3. Home price and loan amount

Homebuyers can pay higher interest rates on loans that are particularly small or large. The amount you'll need to borrow for your mortgage loan is the home price plus closing costs minus your down payment. Depending on your circumstances or mortgage loan type, your closing costs and mortgage insurance may be included in the amount of your mortgage loan, too.

If you've already started shopping for homes, you may have an idea of the price range of the home you hope to buy. If you're just getting started, real estate websites can help you get a sense of typical prices in the neighborhoods you're interested in.

Enter different home prices and down payment information into the Explore Interest Rates tool to see how it affects interest rates in your area.

4. Down payment

In general, a larger down payment means a lower interest rate, because lenders see a lower level of risk when you have more stake in the property. So if you can comfortably put 20 percent or more down, do it-you'll usually get a lower interest rate.

If you cannot make a down payment of 20 percent or more, lenders will usually require you to purchase mortgage insurance, sometimes known as private mortgage insurance (PMI). Mortgage insurance, which protects the lender in the event a borrower stops paying their loan, adds to the overall cost of your monthly mortgage loan payment.

As you explore potential interest rates, you may find that you could be offered a slightly lower interest rate with a down payment just under 20 percent, compared with one of 20 percent or higher. That's because you're paying mortgage insurance-which lowers the risk for your lender.

It's important to keep in mind the overall cost of a mortgage. The larger the down payment, the lower the overall cost to borrow. Getting a lower interest rate can save you money over time. But even if you find you'll get a slightly lower interest rate with a down payment less than 20 percent, your total cost to borrow will likely be greater since you'll need to make the additional monthly mortgage insurance payments. That's why it's important to look at your total cost to borrow, rather than just the interest rate.

Make sure you are factoring in all of the costs of your loan when you are shopping around to avoid any costly surprises. You can use our Explore Interest Rates tool to see how different down payment amounts will affect both your mortgage interest rate and the amount of interest you'll pay over the life of the loan.

5. Loan term

The term, or duration, of your loan is how long you have to repay the loan. In general, shorter term loans have lower interest rates and lower overall costs, but higher monthly payments. A lot depends on the specifics-exactly how much lower the amount you'll pay in interest and how much higher the monthly payments could be depends on the length of the loans you're looking at as well as the interest rate.

Learn more about your loan term, and then try out different choices with our Explore Interest Rates tool to see how the length and rate of your loan would affect your interest costs.

6. Interest rate type

Interest rates come in two basic types: fixed and adjustable. Fixed interest rates don't change over time. Adjustable rates may have an initial fixed period, after which they go up or down each period based on the market.

Your initial interest rate may be lower with an adjustable-rate loan than with a fixed rate loan, but that rate might increase significantly later on. Learn more about interest rate types and then use our Explore Interest Rates tool to see how this choice affects interest rates.

7. Loan type

There are several broad categories of mortgage loans, such as conventional, FHA, USDA, and VA loans. Lenders decide which products to offer, and loan types have different eligibility requirements. Rates can be significantly different depending on what loan type you choose. Talking to multiple lenders can help you better understand all of the options available to you.

Learn more about the different types of mortgage loans in our "Buying a House" tool.

One more thing to consider: The trade-off between points and interest rates
Generally, points and lender credits let you make tradeoffs in how you pay for your mortgage and closing costs.

Points, also known as discount points, lower your interest rate in exchange for an upfront fee. By paying points, you pay more upfront, but you receive a lower interest rate and therefore pay less over time. Points can be a good choice for someone who knows they will keep the loan for a long time.

Lender credits might lower your closing costs in exchange for a higher interest rate. You pay a higher interest rate and the lender gives you money to offset your closing costs. When you receive lender credits, you pay less upfront, but you pay more over time with the higher interest rate. Keep in mind that some lenders may also offer lender credits that are unconnected to the interest rate you pay-for example, a temporary offer, or to compensate for a problem.

As you shop for a mortgage, you'll see that lenders also offer different interest rates on loans with different "points."

1. You can decide you don't want to pay or receive points at all.

2. You can pay points at closing to receive a lower interest rate.

3. You can choose to have lender credits and use them to cover some of your closing costs but pay a higher rate.

There are three main choices you can make about points and lender credits:

Learn more about evaluating these options to see if points or credits are the right choice based on your goals and financial situation.

Now you know

It's not just one of these factors-it's the combination-that together determine your interest rate. Everyone's situation is different, which is why you can use our Explore Interest Rates tool to see what you can expect based on your personal factors.

By understanding these factors, you'll be well on your way to shopping for the right mortgage loan-and interest rate-for you and your situation. Not all of these factors are within your control. But understanding how your mortgage interest rate is determined will help you be more informed as you shop for a mortgage.

Use the Explore Interest Rates tool to help you decide what's right for you.

As you consider your budget and make decisions about things like your down payment amount and home price, check the Explore Interest Rates tool often. The more you know, the more accurate the rates will be.

As you start talking to lenders, compare their offers to the rates in the tool-and to offers from other lenders-to see if you are getting a good deal and to help negotiate the best deal for you.

Just remember:

We've got a lot of information to help you get started

Get a copy of Your Home Loan toolkit for an overview of the process and some tools to help you define what affordable means to you.

Visit Owning a Home to help you navigate the process from shopping for a mortgage all the way to closing.

Check out Ask CFPB, our database of common financial questions.

Editor's note: This post was originally published on January 20, 2015. We've updated it to provide more comprehensive information and to include updated links to our Owning a Home tools and resources.
If you've decided now is the right time to buy, our tools and resources can help you get started.

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Seven factors that determine your mortgage interest rate | Consumer Financial Protection Bureau

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Your lender knows how your interest rate gets determined, and we think you should, too. Our Explore Interest Rates tool lets you plug in some of the factors that affect your interest rate. You can see what rates you might expect-and how changes in these factors may affect interest rates for different types of loans in your area.

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The bar graph below shows the effects of increasing rates while purchasing a property. I can see that the mortgage rate was at a peak during 2017 projection compared to the current rate of 3.5%.

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This image expresses the bar graph representation of credit scores with the rate of interest. More the credit score, less is the interest rate.

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This short video explains what is interest rate and roles it plays when lending money. It play san important role in keeping the economy moving as it encourages people to borrow, to lend and to spend. It explains that charging the borrower with interest rate is like compensation for lending money.
The video is very self explanatory and I found it very useful for the persons who is new to this system. One should for sure understand these factors before borrowing money

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend. But prevailing interest rates are always changing, and different types of loans offer different interest rates. If you are a lender, a borrower, or both, it's important you understand the reasons for these changes and differences.​ They also have a heavy effect on the rare metals trade, including silver stocks.

Key Takeaways

Lenders and Borrowers

The money lender takes a risk that the borrower may not pay back the loan. Thus, interest provides a certain compensation for bearing risk. Coupled with the risk of default is the risk of inflation. When you lend money now, the prices of goods and services may go up by the time you are paid back, so your money's original purchasing power would decrease. Thus, interest protects against future rises in inflation. A lender such as a bank uses the interest to process account costs as well.

Borrowers pay interest because they must pay a price for gaining the ability to spend now, instead of having to wait years to save up enough money. For example, a person or family may take out a mortgage for a house for which they cannot presently pay in full, but the loan allows them to become homeowners now instead of far into the future.

Businesses also borrow for future profit. They may borrow now to buy equipment so they can begin earning those revenues today. Banks borrow to increase their activities, whether lending or investing and pay interest to clients for this service.

Interest can thus be considered a cost for one entity and income for another. It can represent the lost opportunity or opportunity cost of keeping your money as cash under your mattress as opposed to lending it. And if you borrow money, the interest you have to pay could be less than the cost of forgoing the opportunity of having access to the money in the present.

How Interest Rates are Determined

Supply and Demand

Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them.

An increase in the amount of money made available to borrowers increases the supply of credit. For example, when you open a bank account, you are lending money to the bank. Depending on the kind of account you open (a certificate of deposit will render a higher interest rate than a checking account, with which you can access the funds at any time), the bank can use that money for its business and investment activities. In other words, the bank can lend out that money to other customers. The more banks can lend, the more credit is available to the economy. And as the supply of credit increases, the price of borrowing (interest) decreases.

Credit available to the economy decreases as lenders decide to defer the repayment of their loans. For instance, when you choose to postpone paying this month's credit card bill until next month or even later, you are not only increasing the amount of interest you will have to pay but also decreasing the amount of credit available in the market. This, in turn, will increase the interest rates in the economy.

Inflation will also affect interest rate levels. The higher the inflation rate, the more interest rates are likely to rise. This occurs because lenders will demand higher interest rates as compensation for the decrease in purchasing power of the money they are paid in the future.

Government

The government has a say in how interest rates are affected. The U.S. Federal Reserve (the Fed) often makes announcements about how monetary policy will affect interest rates.

The federal funds rate, or the rate that institutions charge each other for extremely short-term loans, affects the interest rate that banks set on the money they lend. That rate then eventually trickles down into other short-term lending rates. The Fed influences these rates with "open market transactions," which is the buying or selling of previously issued U.S. securities. When the government buys more securities, banks are injected with more money than they can use for lending, and the interest rates decrease. When the government sells securities, money from the banks is drained for the transaction, rendering fewer funds at the banks' disposal for lending, forcing a rise in interest rates.﻿﻿

Types of Loans

Of the factors detailed above, supply and demand are, as we implied earlier, the primary forces behind interest rate levels. The interest rate for each different type of loan, however, depends on the credit risk, time, tax considerations (particularly in the U.S.), and convertibility of the particular loan.

Risk refers to the likelihood of the loan being repaid. A greater chance that the loan will not be repaid leads to higher interest rate levels. If, however, the loan is "secured," meaning there is some sort of collateral that the lender will acquire in case the loan is not paid back (i.e., such as a car or a house), the rate of interest will probably be lower. This is because the risk factor is accounted for by the collateral.

For government-issued debt securities, there is, of course, minimal risk because the borrower is the government. For this reason, and because the interest is tax-free, the rate on treasury securities tends to be relatively low.

Time is also a factor of risk. Long-term loans have a greater chance of not being repaid because there is more time for the adversity that leads to default. Also, the face value of a long-term loan, compared to that of a short-term loan, is more vulnerable to the effects of inflation. Therefore, the longer the borrower has to repay the loan, the more interest the lender should receive.

Finally, some loans that can be converted back into money quickly will have little if any loss on the principal loaned out. These loans usually carry relatively lower interest rates.

The Bottom Line

As interest rates are a significant factor of the income you can earn by lending money, of bond pricing and of the amount you will have to pay to borrow money, it is important that you understand how prevailing interest rates change: primarily by the forces of supply and demand, which are also affected by inflation and monetary policy. Of course, when you are deciding whether to invest in a debt security, it is important to understand how its characteristics determine what kind of interest rate you can receive.

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What Are the Forces Behind Interest Rates and What Causes Them to Rise?

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An interest rate is the cost of borrowing money. Or, on the other side of the coin, it is the compensation for the service and risk of lending money. In both cases it keeps the economy moving by encouraging people to borrow, to lend, and to spend.

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This video explains the car interest rates. It is almost the same as any other interest but here in an auto loan has to make payment biweekly and interest in added in it. The rate scan be affected by factors like if you miss one of the payment your interest rate can be increased. More the down payment you do to buy the car, less interest you have to pay!
I found it considerably easy and cleared my concept of auto loan.

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The video explains the recent interest rate increase done by the Bank of Canada. The various strategies that they use to do so. First, the Bank of Canada will decrease the interest rate and then for the upcoming there is tremendous increase in it.

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This video is of Steven Polar, where he states that
Bank of Canada has always tried to maintain the interest rates "neutral". That being said, Bank of Canada considers this neutral as 2.5%.
The astonishing piece of this interview is that we are at present at around 1.75% and we need to climb a lot more stairs to be there at neutral.

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Website:3: General factors affecting Interest rates

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Website:3: General factors affecting Interest rates

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This website is very simple, yet with most of the information. In the beginning it explains the meaning of interest and the reason of having interest rates. There are three main factors that affect interest rates. First, the risk that the borrower might not repay the money. Well, the burden of this is more on provincial policies rather than the federal government. Secondly, risk depends on the time period the money is loaned. The borrower's ability to repay money varies after an year or 10 years. Third, inflation affects the purchasing power of the money when it is repaid to the lender.

This article personally helped me (minouti) a lot to understand the basics of interest rates. It is from The Canadian encyclopedia so it is precise and reliable. The unique piece of information that we found was that the three main factors that are responsible for most of the fluctuation and interest rates works according to the policies incorporated by the Bank of Canada

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​Interest, Credit and Loans

Interest refers to the amount of money that a borrower pays for money borrowed. Interest payments do not reduce the principal amount (the original amount of money borrowed). Interest is usually paid in increments. To calculate the money owed at each increment, a percentage rate or interest rate is set and agreed upon. For example, a $100 loan with a 3 per cent monthly interest rate means that the borrower will owe the lender 3 per cent of the remaining balance of their debt at the end of the payment period. The interest arrangement means that if the borrower continues to owe the full $100 after the first payment period, he or she will be charged $3 in interest and will owe the lender $103. Interest is integral to credit and loan agreements because it allows borrowers to delay repaying the full amount of money they borrowed. Interest also creates an incentive for lenders to release money into circulation.

Credit is a contractual arrangement between a borrower and a lender in which the lender is pre-approved for a loan. The lender provides the borrower with something of value, and the borrower agrees to return that value to the lender at an agreed upon date. In most credit relationships, interest provides incentive for the lender to part with something of value and for the borrower to repay what they owe. Credit repayments can be made either in instalments (e.g., in-store credit) or on a revolving basis (e.g., credit card credit).

Similar to credit, a loan agreement involves a lender providing money, property or anything of value to a borrower. A loan agreement normally has terms agreed upon by both the lender and borrower, including how long the borrower has to repay the lender and how much interest the lender will charge the borrower.

Interest Rates

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Interest is stated as a rate (a percentage of the principal amount borrowed) to be charged for either an agreed or indefinite period of time that the money is on loan. The interest rate can be either fixed or variable. Fixed interest rates remain the same for either the entire duration of the loan term or for a specified period of the loan term, while variable interest rates can fluctuate over the loan term.

Three main factors affect interest rates. First, there is a risk that the borrower cannot or will not repay the money. The risk of lending to the federal government is not large (although even countries, or sovereign borrowers, have defaulted on loans), but it rises somewhat on loans to provinces and even more on loans to large companies. On loans to individuals, risk is often reduced by a mortgage on property or collateral (something valuable, such as a bond deposited with the lender as security). The lender can then seize the collateral if the loan is not repaid. Unsecured consumer loans carry a high risk ( see Consumer L​a​w), and therefore have high interest rates.

Second, risk increases the longer the money is loaned. The borrower's ability to repay money may not change much in a month or a year, but over 10 or 20 years it may change radically, as may the need of the lender for the use of their own money.

Third, inflat​ion affects the purchasing power of the money when it is repaid to the lender. For example, on a $100 loan at 5 per cent interest, the lender will lose money if inflation runs at 10 per cent per year because the $105 paid in principal and interest at the end of one year will buy only what about $95 would have bought when the loan was made. The inflation that must be taken into account, however, is not the inflation rate at the time the loan is made or over the year; it is the future rate, which can only be guessed by lender and borrower. If inflation is generally expected to drop, short-term loans may cost more in interest than long-term loans, because the greater risk of default on the longer-term loan is more than balanced by the hope of lower inflation.

In the 1970s and 1980s, economists found that uncertainty also affected interest rates. Real interest rates - that is, the stated rates minus the expected inflation rate - had risen above 8 per cent by 1990, because in a time of economic instability, lenders had attempted to protect themselves from uncertainty.

The general level of interest rates is also affected by the demand for borrowed money, which tends to rise and fall with the economy ( see Business Cycles). In times of ​recessi​​on, businesses and consumers are less interested in borrowing, and this tends to reduce the general level of rates. But with economic recovery, businesses want to expand and consumers want to buy on credit, and this increases the demand for loans. Since the financial service reforms of the 1980s and 1990s, increased loan demand has been met by creditors through the selling of debt in the form of asset-backed securities. This process is often referred to as securitization.

History of the Bank Rate in Canada

The Bank of ​Canada fixes the bank rate, which is the amount it charges for the relatively infrequent loans it makes to the chartered banks. Canada's central bank was formed by an Act of Parliament in 1934 to help the federal government better manage the national economy.

Until the First World War, almost all Canadian government borrowing took place outside of Canada, in the United Kingdom. The reliance on foreign loans resulted in a lot of volatility in the Canadian economy. After the war, the Canadian government and its chartered banks sought credit within the Canadian market. However, the switch to the Canadian market did not reduce economic volatility. Following the Great Depression, the Canadian government decided to form a central bank to help increase the money supply and generate "cheap money" - a loan, or credit, with a low interest rate. The belief that guided this policy was that cheap money from low bank and interest rates would result in full employment (the lowest possible unemployment rate).

The drive to provide full employment met a serious challenge in the late 1950s, when inflation, or a rise in prices, started to impact the Canadian economy. To confront inflation, Bank of Canada Governor James Coyne ordered a reduction in the Canadian money supply and raised the bank rate.

DID YOU KNOW?

The Bank of Ca​nada fixes the bank rate, which is the amount it charges for the relatively infrequent loans it makes to thechartered banks. The bank rate signals the direction in which the Bank of Canada wants interest rates to move. The Bank of Canada will raise the bank rate to try to reducein​flation, for example, or lower the bank rate to help curb deflation (a decline in money supply - the opposite of inflation).

During the 1970s, the bank rate was fixed at a certain percentage rate for periods that typically lasted for months and then changed by a Bank of Canada announcement. In 1975, Prime Minister Pierre Elliott Trudeau introduced the Anti-Inflation Board, which sought to control wage and price increases. Correspondingly, the Bank of Canada began to try to cut inflation by raising interest rates in 1978 through 1981. This move was based on the theory that with high interest rates, consumers would be unwilling to borrow for goods such as houses and cars, and businesses would be unwilling to invest; thus, a rise in interest rates would cut down the demand for goods and services, which would reduce the upward pressure on prices. This policy (the use of interest rates to cut inflation) culminated in 1981 when the bank rate rose above 21 per cent and the prime lending rate was 22.75 per cent.

Canadian rates might not have reached such levels had it not been for the rise in rates in the United States, where a similar monetarist policy was in effect ( see Mo​netary Policy). When American rates rise and Canadian rates do not follow, money tends to flow to the US as lenders seek the higher return on their loans. This outflow pushes the value of the Canadian dollar down relative to the value of other foreign currencies, such as the American dollar. Imported goods then cost more in Canadian dollars ( see Imports), and this tends to raise the inflation rate in Canada. One way to break the close connection between Canadian and American interest rates is to control the flow of money in and out of Canada, as was done during the Second World War by a system of exchange controls ( see Exchange Rates).

Overnight Rate

The overnight rate refers to the interest rate used by large ba​nks in the overnight market to lend and borrow from each other. In Canada, the Bank of Canada sets a target rate for the overnight rate, which it refers to as the policy interest rate. In March 1980, the Bank of Canada shifted to a system under which the bank rate was changed each week to match changes in the rate paid by the federal government to borrow money for 90 days by selling treasury bills. In February 1996, the Bank of Canada adopted a new approach. It began setting the bank rate at the upper limit on a one-half-percentage-point range (e.g., 0.75 per cent to 1.25 per cent) for overnight loans to financial institutions - over which it has more control than the rate on 90-day treasury bills. The range, or operating band, is fixed by the bank and is only adjusted when the bank wants a change in other short-term rates, such as for consumer and business loans. For example, the bank rate was changed five times in 1998. At the end of 1998, the bank rate was 5.25 per cent, which was the top of the 4.75 to 5.25 per cent operating band. Other lenders, usually, quickly match changes in the bank rate with increases or decreases in their prime rates, to which consumer and business loans are tied. In November 2000, the Bank of Canada announced that it planned to introduce eight fixed dates each year to announce changes to the overnight rate. Fixed announcements of possible interest rate changes ensure less speculation about a rate that affects not only large banks, but consumer loan and mortgage rates, as well as the exchange rate for the Canadian dollar.

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Interest refers to the amount of money that a borrower pays for money borrowed. Interest payments do not reduce the principal amount (the original amount of money borrowed). Interest is usually paid in increments. To calculate the money owed at each increment, a percentage rate or interest rate is set and agreed upon.

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Website:4: Factors affecting Auto loan interest rates

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Website:4: Factors affecting Auto loan interest rates

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In this website, there is a list of factors that majorly affect the rates fluctuation of an auto loan. These are as follows: 1. The age of the vehicle, 2. The length of loan, 3. Debt-to-Income Ratio, 4. Down Payment, 5. Economic Strength and 6. Economic Inflation.

The interesting piece of information that we found in this was earlier we thought that everything as in each factor is in our hand to control the interest rates. but, after reading this website we came to know is that if one has a good credit then you can easily be eligible for loan and afford of car.