"Rent" Money

# "Rent" Money

It goes like this:

• Interest is what you pay to borrow money.
• What you pay is based on the amount you borrow.
• You borrow \$1,000.
• The interest rate the bank’s going to charge is 10%.
• You pay \$100 a year to use that \$1,000.

This interest rate is called the Annualized Percentage Rate (APR). It’s splashed everywhere on credit card ads: 0% APR…low APR…12.99% APR! It’s the rate that people use to compare credit cards. But it understates the rate you’ll actually wind up paying. That real rate—the effective APR—is always a little higher because credit card companies calculate interest monthly and the APR is based on calculating interest annually, or just once a year.

 Nominal APR Effective APR Annualized rate 18.0% 19.6% Divided by 12 months 12 12 Monthly rate 1.50% 1.63% Monthly payment \$15.00 \$16.30 Interest you pay in a year \$180.00 \$195.62

There are dozens of different rates and reasons why those rates are higher or lower for a given person. For more interest info, go here.