Personal Finance

CIBC LOC and interest charges added to principal - what other banks do this?

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  • May 23rd, 2018 8:05 am
[OP]
Member
Jun 28, 2011
255 posts
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VANCOUVER

CIBC LOC and interest charges added to principal - what other banks do this?

I have a LOC with RBC (paid off) and every month, I would get a statement indicating how much interest I owe. RBC doesn't add the interest owing onto the LOC principal.

I have a LOC with CIBC which I'm paying off and their practice is to add the interest owing onto the principal at the time of the statement date and they charge interest on the interest added to the principal amount. Black Question Mark Ornament
Am I missing something? To me, it sounds like a way to get more money from me but I can't imagine the other banks not doing something similar, except for not adding the interest to the principal amount.

Do other banks do the same thing as CIBC with their LOC?
11 replies
Sr. Member
Jul 28, 2012
874 posts
264 upvotes
Montreal
Do you still have your credit agreement that you originally signed with CIBC? It should indicate how interest is calculated and when/if it is added to the principal.
Jr. Member
May 16, 2017
182 posts
149 upvotes
travelandshoppingwoman77 wrote:
May 16th, 2018 4:15 pm
I have a LOC with RBC (paid off) and every month, I would get a statement indicating how much interest I owe. RBC doesn't add the interest owing onto the LOC principal.

I have a LOC with CIBC which I'm paying off and their practice is to add the interest owing onto the principal at the time of the statement date and they charge interest on the interest added to the principal amount. Black Question Mark Ornament
Am I missing something? To me, it sounds like a way to get more money from me but I can't imagine the other banks not doing something similar, except for not adding the interest to the principal amount.

Do other banks do the same thing as CIBC with their LOC?
I've had LoCs with ING (pre-Tangerine days) and a current one with Coast Capital Savings CU. They both did/do as CIBC does. The thing is that the interest is added the same day that the minimum payment is due (which is the interest amount), so yes it does have a compounding effect - however, the RBC calculation in reality could have the same end result.
[OP]
Member
Jun 28, 2011
255 posts
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VANCOUVER
robsaw wrote:
May 16th, 2018 5:57 pm
I've had LoCs with ING (pre-Tangerine days) and a current one with Coast Capital Savings CU. They both did/do as CIBC does. The thing is that the interest is added the same day that the minimum payment is due (which is the interest amount), so yes it does have a compounding effect - however, the RBC calculation in reality could have the same end result.
Thanks for your response.
With my CIBC LOC, the statement is issued around the 20th of the month (with the interest amount owing) and the interest is added to the principal LOC amount and the interest amount is taken out of my chequing account the following month on the 15th. If I were to make a payment after the interest amount is added, then it will reduce how much is debited from my account the following month. (depending on how much I put towards the balance).

I'd say you're right about the RBC LOC calculation ending up with the same result without adding the interest amount to the principal.
I can't see the banks not having the calculations the same across the board.

I'm just annoyed that this wasn't explained when I opened my LOC and that's with the branch level.
:rolleyes:
Member
Nov 8, 2017
459 posts
169 upvotes
travelandshoppingwoman77 wrote:
May 16th, 2018 6:19 pm
Thanks for your response.
With my CIBC LOC, the statement is issued around the 20th of the month (with the interest amount owing) and the interest is added to the principal LOC amount and the interest amount is taken out of my chequing account the following month on the 15th. If I were to make a payment after the interest amount is added, then it will reduce how much is debited from my account the following month. (depending on how much I put towards the balance).

I'd say you're right about the RBC LOC calculation ending up with the same result without adding the interest amount to the principal.
I can't see the banks not having the calculations the same across the board.

I'm just annoyed that this wasn't explained when I opened my LOC and that's with the branch level.
:rolleyes:
Why do you have a chequing account when your LOC is essentially the same thing, yet free?
[OP]
Member
Jun 28, 2011
255 posts
42 upvotes
VANCOUVER
User455957 wrote:
May 16th, 2018 7:59 pm
Why do you have a chequing account when your LOC is essentially the same thing, yet free?
I opened an account with CIBC to take advantage of their offer ($300 bonus for opening an account) plus they gave me a lower rate on the LOC.
I'll look at revamping things once the one year time frame is up (for opening the account) and use my LOC as a chequing account
Newbie
Nov 22, 2012
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AMHERST
travelandshoppingwoman77 wrote:
May 16th, 2018 4:15 pm
I have a LOC with RBC (paid off) and every month, I would get a statement indicating how much interest I owe. RBC doesn't add the interest owing onto the LOC principal.

I have a LOC with CIBC which I'm paying off and their practice is to add the interest owing onto the principal at the time of the statement date and they charge interest on the interest added to the principal amount. Black Question Mark Ornament
Am I missing something? To me, it sounds like a way to get more money from me but I can't imagine the other banks not doing something similar, except for not adding the interest to the principal amount.

Do other banks do the same thing as CIBC with their LOC?
Yes, I believe all banks charge interest from the day you borrow money until the day it is paid back in full and the interest is calculated on the daily balance. There is no interest-free grace period. Thus interest is accrued daily, but typically not posted until your statement closes. How this is reported on your statement may differ, but my LOC statements have a line which shows the total interest incurred during the month. This interest is included in the closing balance.
Member
Mar 30, 2009
356 posts
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Toronto
robsaw wrote:
May 16th, 2018 5:57 pm
I've had LoCs with ING (pre-Tangerine days) and a current one with Coast Capital Savings CU. They both did/do as CIBC does. The thing is that the interest is added the same day that the minimum payment is due (which is the interest amount), so yes it does have a compounding effect - however, the RBC calculation in reality could have the same end result.
This is probably correct. Technically, it does compound, because the interest charged is getting withdrawn from the account. However, because of the way the payments are actually structured, it doesn't actually matter. A line of credit is calculated interest based on the average daily closing balance of the month. Now, the keyword here is closing. This means that it's calculated at 11:59:59 pm each day, i.e. right before the day rolls over. So say you have a $10k balance and get charged $50, and your minimum payment that gets auto paid is also $50. Your closing balance for the day is $10000 + $50 - $50 = $10000, meaning that you're still not getting charged interest on the interest anyway, even though it did technically compound onto the balance during the day. So there's likely nothing to worry about here, but if you're really concerned, CIBC is probably who you should actually ask.
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Corvillus wrote:
May 17th, 2018 11:50 pm
This is probably correct. Technically, it does compound, because the interest charged is getting withdrawn from the account. However, because of the way the payments are actually structured, it doesn't actually matter. A line of credit is calculated interest based on the average daily closing balance of the month. Now, the keyword here is closing. This means that it's calculated at 11:59:59 pm each day, i.e. right before the day rolls over. So say you have a $10k balance and get charged $50, and your minimum payment that gets auto paid is also $50. Your closing balance for the day is $10000 + $50 - $50 = $10000, meaning that you're still not getting charged interest on the interest anyway, even though it did technically compound onto the balance during the day. So there's likely nothing to worry about here, but if you're really concerned, CIBC is probably who you should actually ask.
+1

CIBC and RBC are most likely no different. So that 6% interest example is good, easy math. Say $50 interest on $10k loan per month. If RBC says your interest is separate, but the same amount in 30 day increments, but CIBC just pools it with balance, and again same interest and same payments going in, then it's a break even, or different flavours of the same thing. You want MacDonald's or Burger King? TELUS or Bell? Eastlink or Shaw? Pokemon or Digimon? Twins or Irish twins? I'll admit that the last example may be the most different, but pointing out the obvious that wording the same bottom line differently doesn't make it different.
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[OP]
Member
Jun 28, 2011
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VANCOUVER
Thanks all to responded. I think it's standard for all banks and I don't want to aggravate myself by calling CIBC customer service.
I'll make it a point of making a payment as soon as the interest charges are put onto my account.
Member
Nov 8, 2017
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I get half my pay dumped into my LOC every two weeks, then I don't worry about payments. I pay bills from it as well and transfer funds with the free etransfers
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Nov 25, 2014
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travelandshoppingwoman77 wrote:
May 23rd, 2018 12:37 am
I'll make it a point of making a payment as soon as the interest charges are put onto my account.
You should make a point of paying your LOC as early as possible regardless of how and when interest appears. Interest is always accumulating based on your daily balance. Earlier payment = less interest.

The optimal way to pay down a LOC is to put everything toward it as soon as you get each paycheck, then pull back out of the LOC when you need to spend. By the end of the month you may have the same balance as if you just paid what was left over, but the average balance throughout the month will be lower and generate a smaller interest charge.
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