How Loan Interest Works in Canada

What Is Loan Interest?

Loan interest is the fee a lender charges you for borrowing money. It is usually expressed as an annual percentage rate (APR). In Canada, most loans use an amortized interest system, meaning your payments include both interest and principal.

With each payment, you slowly reduce the loan balance. Early payments go mostly toward interest, while later payments go more toward principal.

How Lenders Calculate Interest in Canada

Canadian lenders typically calculate interest using a standardized amortization formula. This formula considers:

• Principal: The amount you borrow
• APR: Annual interest rate
• Loan term: Length of the loan, usually in years
• Payment frequency: Monthly, bi-weekly, or weekly

You can see how this affects your payments using our Loan Payment Calculator.

Simple Interest vs. Amortized Interest

Simple Interest

Simple interest loans calculate interest only on the original balance. They are more common for short-term loans and lines of credit.

Amortized Interest

This is used for:

• Mortgages
• Car loans
• Personal loans
• Student loans

Each monthly payment includes:

• A portion of interest
• A portion of principal

In the early years, interest makes up most of the payment. Toward the end, almost the entire payment goes to principal.

Example: $20,000 Personal Loan at 8% APR

Loan Amount	Rate (APR)	Term	Monthly Payment	Total Interest
$20,000	8%	5 Years	≈ $405	≈ $4,300

Try it using our Loan Payment Calculator.

Factors That Affect Your Total Interest

1. Interest Rate (APR)

Higher APR = higher payments and more interest over the life of the loan. Even a tiny change can increase or decrease your total cost by thousands.

2. Loan Term

Longer loan terms mean:

• Lower monthly payments
• Much higher total interest

3. Credit Score

In Canada, borrowers with excellent credit can receive much lower interest rates. Poor credit often results in higher APRs, especially for car loans or personal loans.

4. Loan Amount

Larger loans naturally produce more total interest, even at the same rate.

5. Payment Frequency

Bi-weekly payments reduce interest and shorten your loan. Many Canadians choose accelerated bi-weekly payments for mortgages.

How Mortgage Interest Works in Canada

Mortgages use amortization over long periods — usually 25 years. This causes interest to accumulate heavily in the first half of the mortgage.

Try our Mortgage Calculator to see the impact of rates and amortization.

Loan Amortization Example

Here’s how interest and principal change over time on a typical loan:

Year	Interest Paid	Principal Paid	Balance Left
1	$1,500	$1,360	$18,640
3	$1,200	$1,680	$14,280
5	$800	$2,100	$9,200

How to Reduce Loan Interest

• Make extra payments toward principal
• Choose a shorter term when possible
• Refinance if interest rates drop
• Improve your credit score before applying
• Negotiate your rate with lenders

Try our Debt Payoff Calculator to explore strategies.

FAQ: Loan Interest in Canada

Is 8% interest high for a loan in Canada?

It depends on the type of loan. For mortgages, 8% is high. For personal loans, it is on the higher end. For car loans, it may be normal depending on your credit score.

What is the average loan interest rate in Canada?

Personal loans: 6–12% Car loans: 4–12% Mortgages: 4–6% (2024–2025 range)

Does paying bi-weekly reduce interest?

Yes — bi-weekly or accelerated payments reduce your amortization faster and save thousands.

Does refinancing help?

Refinancing at a lower rate lowers your monthly payment and total interest — a smart move when rates drop.

Final Thoughts

Understanding loan interest helps you borrow smarter and avoid unnecessary costs. Use our calculators to compare scenarios and make confident financial decisions.