How Rising Interest Rates Impact Borrowing Money

by | Nov 16, 2022 | Featured Finance, Finance and Business

How rising interest rates impact borrowing money

(NC) Research shows that more than half of all Canadians lack the numeracy skills needed to properly understand charts, numbers and documents that impact your level of debt or savings. With interest rates on the rise, it’s important to understand how interest works and how it will impact the cost of borrowing.

Interest basics

Interest is, simply put, the amount of money you must pay back for the privilege of borrowing money. The Bank of Canada sets a benchmark rate that it moves up or down in an effort to quell rising inflation and stabilize the economy. Other lenders set their rates based on the Bank of Canada’s figure.

Credit card interest

The most common form of debt most of us face is from our credit cards. The interest rate credit cards charge is very high, often 20 per cent or more. These rates aren’t really impacted by changes to the federal bank rate, but if you use a line of credit to pay off your credit card bills, the interest rate on your credit line will go up if rates continue to rise.

Fixed versus variable

The biggest form of debt most Canadians have is a mortgage on their home or condo. There are two basic types of mortgages you can apply for: a fixed rate or a variable rate mortgage. Fixed rate mortgages, as the name suggests, are set at a fixed interest rate amount for the duration of the term, often five years.
Variable rate mortgages start at a lower interest than fixed rates, but will rise as interest rates go up. However, if interest rates go down, the rate on your variable-interest mortgage will also go down.
Variable rates can offer savings, while fixed rates provide the security of knowing exactly how much you’ll owe.

Consolidated loans

If your debt has become unmanageable and is growing every month, speak to your lender about possible solutions, such as combining multiple debts into one lower-interest loan.
ABC Life Literacy Canada’s Money Matters program offers free workbooks, activities and workshops to help Canadians better manage their finances. Learn more at abcmoneymatters.ca.

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