The interest rate is the percentage of borrowed principal that lenders charge annually for the use of their money. When municipalities borrow through debentures or loans, the interest rate determines annual interest costs. Interest rates vary based on: general market conditions (influenced by Bank of Canada policy and economic factors), the borrower's creditworthiness (credit rating), loan term (longer terms often have higher rates), and whether rates are fixed or variable. Municipal interest rates are typically lower than commercial rates because municipal debt is considered low-risk—municipalities have taxing authority and rarely default. Even small interest rate differences significantly affect total borrowing costs over long-term debt. For example, a 0.5% rate difference on $10 million borrowed for 20 years exceeds $500,000 in additional interest. Municipalities monitor interest rate trends when planning borrowing, potentially timing debt issuance to capture favourable rates, and may refinance existing debt when rates fall substantially.