Figuring out interest costs

1. The annual percentage rate (APR)

The APR includes all loanLoan An agreement to borrow money for a set period of time. You agree to pay back the full amount, plus interest, by a set date.+ read full definition service costs and interest. It may be higher than the interest rateInterest rate A fee you pay to borrow money. Or, a fee you get to lend it. Often shown as an annual percentage rate, like 5%. Examples: If you get a loan, you pay interest. If you buy a GIC, the bank pays you interest. It uses your money until you need it back.+ read full definition you see in the loan contractContract A binding written or verbal agreement that can be enforced by law.+ read full definition. A lenderLender Any person or organization that lends money.+ read full definition must tell you the APR before you sign a loan agreement.

To understand the APR on a loan, ask:

  • how much interest you’ll pay in total,
  • if there are any fees or extra charges, and
  • if there are any other costs, such as loan insuranceLoan insurance Insurance that pays your loan payments if you lose your job or become sick or hurt and can’t work.+ read full definition.

2. How the lender calculates the interest

The way interest is calculated will affect the cost of your loan. For example, interest on a mortgageMortgage A loan that you get to pay for a home or other property. Often the loan is for 20 years or more. You make a set number of payments for a set amount each year.+ read full definition is calculated in a different way than interest on a credit card.

Most mortgages use the remaining balance method. The lender multiplies the interest rate by the principalPrincipal The total amount of money that you invest, or the total amount of money you owe on a debt.+ read full definition balance at the start of each termTerm The period of time that a contract covers. Also, the period of time that an investment pays a set rate of interest.+ read full definition. You don’t pay interest on any principal you’ve repaid.

With credit cards, you have to pay off all of your charges each month. If you don’t, you’ll pay interest on the full amount you owe. With some cards, you pay interest on your daily balance, or your average daily balance. With others, you pay interest on your highest monthly balance.

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Use this calculator to figure out how long it will take to pay off credit cards and other debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition.

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