What's the difference between prime, base, and variable rates?
Recently, I went to Bank of Montreal to apply a line of credit. I thought the prime rate was pretty low currently at 2.25%, so perhaps it would be a good time to apply for LOC. However, I was wrong.
When I got the reply from BMO, the financial officer told me that if I would like to apply for an LOC $20,000, I had to show them a statement of $40,000 I currently had in my RRSP account. I guess they want to use that as a guaurantee for the creditline. That was no problem for me. However when I asked about the interest rate, the answer shocked me. The rate would be 7.5%!!! Of course, you will probably know the next question I asked—how is the line of credit interest rate calculated?
In summery, for a $20,000 line of credit:
- Proof of $40,000 RRSP asset
- Interest rate 7.5% = 2.25% prime rate + 2.5% base rate + 2.75% variable rate
The way BMO calculates their rate puzzles me a lot. I did online search many times, and all I could find is that the rate for LOC is calculated as prime + variable rate. I couldn’t find any site that says LOC rate = prime + base + variable.
I really wish someone shed some light on this rate matter for me!!! Anyone has the same situation as me with BMO???
Perhaps BMO is not a good bank for borrowing money. They will probably lose many clients for that weird rate formula.