Calculating how much they owe

Standard interest rates by debt type

Almost all of our biggest purchases and investments in life are accompanied by a loan. Save for high earners and the independently wealthy, nobody purchases a car or starts a business without taking one out.

But major loans translate into major debt. More often than not, loan recipients are saddled with a debt that lasts longer than the average network TV show. And if they aren't careful, that debt could end up dictating the quality of their life.

That's why with debt, it's critical to know what one is getting into before pulling the trigger on a purchase. Being able to lay out a solid down payment for something is completely different than being able to pay interest consistently on a loan. The latter should always be a prerequisite for the former.

So without further ado, here's an overview of the standard interest rates for a variety of different debt types.

Business loan

Business loans are a valuable resource for entertprises that are just starting out, as well as established ones that need a bit of extra funding to get themselves through a certain period. In both cases, Canadian business owners can turn to either public or private sources for loan funding.

This country has a government sponsored program called the Canada Small Business Financing Loan (CSBFL). Here's what it says about interest rates: "Maximum interest rate on variable rate loans is Prime* + 3.0% which includes an annual administration fee equal to an annual rate of 1.25% which is payable to the government."  

*Canada's prime rate is currently 2.95%.                                                                                         

Private business loans are available as well, but their rates will differ based on the institutions. One such example is the Term Loan Program from Toronto-based alternative lender iCapital. It lends at a rate that is proportional to the length of the term. For its six-month terms, interest amounts to 0.18 of every dollar the borrower takes. That rises to 0.22 for a nine-month term and 0.28 for a 12-month term.

Student loan

The most popular source of student loan funding is the government. Although each province has a separate student aid program that applicants go to, they are each affiliated with a federal organization that generally covers part of the loan.

In Ontario, student aid is facilitated through the Ontario Student Assistance Program (OSAP). The provincial portion of OSAP is paid back at the prime rate of interest + 1% while the federal part is paid back at the prime rate + 2.5%.

OSAP won't necessarily cover a student's entire tuition—or it could reject a student entirely. For those seeking educational funding from elsewhere, banks and private lenders are the other available options. Any rate they provide will almost certainly be more than a government sponsored program. Double digit rates are not unusual.

Car loan

Car loan interest rates can be tricky. To borrow a line from Shakespeare, sometimes "fair is foul and foul is fair" when it comes to the actual value of a deal. 

For example, you can have an Annual Percentage Rate (APR, essentially the same thing as interest) that is close to or at zero, but it might come at the expense of getting a low overall payment number. Same goes for high APRs that seem to stretch endlessly into an extended term.

So it may not be the APR that determines whether a car purchase is good or bad. That said, a strandard interest rate for a new car is likely going to be somewhere between zero and five percent, with most falling in the two per cent range for buyers with good credit. Used cars will typically average slightly more than that.  

Personal and credit card loans

These two types of loans are similar in the sense that they aren't tied to a central expenditure like a car or business. They could conceivably be used for any purpose; a pricey destination wedding, a fancy wardrobe in advance of starting a new job, etc. Yet they also differ in the sense that they generally have dissimilar interest rates.

A credit card loan can occur in two ways. One is by simply using the card to make purchases. This is the most common method. The second is to take out a cash advance. While both types of credit card loans typically hover around the ballpark of 20 per cent interest, cash advances will be a little more expensive, closer to 22 or 23 per cent interest.

Personal loans are different in the sense that they generally represent more of a long-term debt—with installment loans being an exception. Someone with good credit should be able to negotiate a personal loan interest rate in the early teens (e.g. 11-15 per cent). Others may have to pay at a rate that more closely resembles the typical credit card rate.