What is the interest rate, and how does it work?

The interest rate is the cost of borrowing money or other financial assets.

An example of interest would be a $20 bill borrowed for one year at an annual percentage rate (APR) of 10%. At this APR, the total interest paid on that $20 over one year is calculated as $2.05.

Therefore, the effective APR for borrowing $20 for one year at 10% is 12%.

A fixed-rate mortgage might have an APR in the range of 3-6%, and a credit card typically carries rates around 20% APR.

However, when considering only variable-rate loans such as home equity loans (HEL), short-term personal loan apps, or payday lenders, the APRs are often north of 30%. They can even reach over 100% (!). That's why it is important to understand what your APR means before you sign any loan documents for your next big purchase or top-up.