Line of Credit: prime rate, base rate, variable rate
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.
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Hi there Ryan,
Stay away from BMO!
I got an unsecured line of credit for 11K from a different bank at prime + 2. Not sure what BMO’s variable rate is – generally you pay a ‘prime’ bank rate, now at 2.25 plus an adjusted increment based largely on your credit score.
If your credit is good and you have secured the loan, you shouldn’t pay much more than 2 points above prime. Check out the competition, I suggest.
I think I’ll try different banks next year. I’m afraid my credit score will suffer if I apply to many banks. I don’t need LOC really at this moment, but I just wanted to try it out and see what rate I would get, which turned out to be a disaster wth BMO.
Do smaller banks and credit unions offer better rates than those five major banks (RBC, BMO, CIBC, Scotia, TD)?