The Basics of Loans

A loan lessens the burden of paying cash outright for major purchases, and allows you to spread the cost out over time. A personal loan, by definition, is an extension of credit by a lender to a borrower, where the borrower agrees to pay back the lender at a predetermined time, with interest. Anyone faced with a large purchase - a home, a car, home renovations or education costs - will likely need to consider borrowing money through a personal loan.

Personal loans are structured credit arrangements. You know your payment amount, and how many payments are required to repay the loan. Repayment terms can vary, and interest rates are either fixed, where the rate stays the same during the term, or variable, where the rate fluctuates with the market.

Unlike a loan, a personal line of credit is a revolving credit facility that provides ongoing access to a reserve of funds. You pay interest only on the amount you use, and the credit is always available without having to re-apply.

How loan rates are determined

Lenders establish their rates based on several factors. These include the prime rate (which is influenced by the Bank of Canada), inflation levels, the type of lending product you want, the amount you wish to borrow, and the term over which you plan to pay the funds back.

Generally, rates are lower when loans are secured with some form of collateral, as the lender has less risk to assume. Your credit rating will also be considered. A higher credit score indicates that you are a lower credit risk, and will likely entitle you to a better rate.

Because the features of a loan are as varied as the reasons for borrowing, it is important that you get the right loan for the right purpose. Your CIBC advisor can help you determine the best product for your personal situation.

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