Truly understanding the cost of your loan isn’t easy. There are many factors that influence what you end up paying in interest and fees. Find out the basics and access resources to help so you can make informed borrowing choices.
Important loan terms
1. Annual interest rate (AIR): An AIR is the annual interest rate – the cost you pay each year to borrow money and it’s referenced as a percentage (fixed or variable). It doesn’t include any of the fees or costs charged for taking out a loan.
2. Annual Percentage Rate (APR): An annual percentage rate (APR) is a yearly interest rate that includes the extra fees and costs that you must pay to borrow money. This APR will reflect what you must pay over the term of the loan, and it’s higher than your interest rate. The rate is calculated by taking the average compound interest rate over the term of the loan.
Understanding the cost of your loan
So, how much does it cost to borrow money? With information adapted from the Financial Consumer Agency of Canada, to understand the cost of your loan, you need to know the annual percentage rate, how the interest is being calculated, and the length of the loan term. It can get complicated, but there are lots of resources available to help you compare your options.
1. Determine the annual percentage rate (APR). This is the actual rate of interest charged on a loan each year. Because the APR is calculated using standardized rules, it can help you compare rates from one loan to another. So, pay attention to the APR, not only the advertised rate. Ask your lender how much total interest you will pay or whether there are any fees or other charges to be aware of.
2. Find out how the lender calculates interest. Different loans use different methods to calculate and compound interest. With credit cards, if you pay the balance in full by the due date, you’re not charged interest. If you don’t pay your balance in full, the interest is most likely being calculated daily. If that’s the case, it means that when your credit card has an annual interest rate (AIR) of 18%, you don’t get charged 18% interest once a year. Instead, the 18% is divided by 365 (for each day in the year) and then multiplied by your average daily balance during the month. Ask your lender how interest is being calculated and explore the resources below to compare options.
3. Understand the length of your loan. The repayment term is how long you agreed to repay a loan. This length can vary greatly and have significant impact on the overall interest you pay. Some credit is revolving, which means you are allowed to borrow up to a certain limit, repay it, and spend it again (like credit cards and lines of credit). With installment loans, you get a lump sum of money that must be repaid in installments by a certain date (like auto loans, mortgages, and personal loans).
Generally speaking, you can calculate the total cost of the loan by multiplying the payment amount by the number of payments in your term. Lenders may extend the duration of the loan to lower your monthly payment. This comes at a cost because you’ll pay more interest over time.
When you compare the total cost of the loan, it’s easier to know which option is best for you.
Consider using loan calculators online to help you fully understand your options and compare what’s available to you.
What about payday loans?
A payday loan is a short-term loan with high fees that make it an expensive way to borrow money. With these loans, you can’t borrow more than $1,500 and it must be repaid within 62 days.
In BC, a payday loan costs a maximum of $15 per $100 that you borrow (including all interest and fees). So, for a two-week loan, the cost is the same as an AIR or APR (as all fees are included) of 390%. For comparison, credit card interest rates vary between 10-30%.
To compare the cost of a payday loan and that of other short-term loans, look at the visual below (adapted from the Financial Consumer Agency of Canada’s information on payday loans).
Comparing payday loans with other types of short-term loans (based on a $300 loan for 14 days)
The illustration above is based on the following assumptions:
- A payday loan costs $15 per $100 that you borrow (including all interest and fees), which is the same as an APR (as all fees are included) of 390%
- The loan is for $300 for 14 days
- A line of credit includes a $5 administration fee plus 8% annual interest on the amount you borrow
- Overdraft protection on a bank account includes a $5 fee plus 21% annual interest on the amount you borrow
- A cash advance on a credit card includes a $5 fee plus 23% annual interest on the amount you borrow
FCAC resources about loans
The Financial Consumer Agency of Canada (FCAC) is federal organization that’s responsible for protecting the rights and interests of consumers when it comes to financial products and services. Explore the FCAC’s resources below to learn more about the different loan options and your rights when borrowing from federally regulated institutions:
- Compare your credit options
- Compare the cost of different credit options
- FCAC – Your Financial Toolkit: Credit and debt management
- Credit cards (choosing one, comparing your options, and understanding interest rates)
- How credit cards work
- Personal loans
- Payday loans
- Lines of credit
- Rent to own plans
- Reverse mortgages
Where to go for help
We license payday lenders in BC and regulate certain aspects of their business practices. Read through our resources on our website to learn about your rights when it comes to payday loans. If you believe a licensed payday lender is breaking the rules after reading through that information, submit a complaint to us directly.
Financial advice and information on other lenders aren’t something we can help you with but there are other options to consider. The Financial Consumer Agency of Canada has tons of information to help you make informed borrowing decisions and they regulate financial institutions in Canada.
You may also be interested in speaking to your financial institution or a financial advisor to see if they can offer you personalized advice on your financial situation.
About Consumer Protection BC
We’re a not-for-profit provincial regulator. The laws we oversee capture your rights when it comes to credit reporting, debt collection, payday loans, high-cost loans, and certain aspects of debt repayment services. Find out more about us and the other industries and transactions we oversee by exploring our website.
Learn more about your rights when it comes to debt and borrowing.
More debt and borrowing resources
Managing debt
How to make a plan to manage your debt
Comparing different debt relief options
The impact of debt on your credit report
How to improve your credit score
How to build healthy financial habits
Debt collection
How to stop collection calls
What to do if it’s not your debt
The rules debt collectors must follow in BC
How to dispute a debt
Borrowing wisely
Things to think about before you take out a loan
Understanding the cost of your loan
The rules for payday lenders in BC
The risks of borrowing money from unlicensed lenders
Buy now, pay later plans: what you need to know
Tell us what you think for a chance to win!
The information above is part of a consumer education initiative on debt and borrowing in BC and we want your input!
By completing the survey, you will be entered to win one of two $300 prizes and you’ll support consumer education in the province. Your feedback will help us fine-tune our educational resources so we can continually improve and help more people make informed debt choices in BC.
