If you've ever looked into borrowing money or applying for a credit card, one of the most confusing numbers that will pop up is the Annual Percentage Rate, or APR.

*What does this number signify, and what is the calculation that goes into it? *

If you've ever looked into borrowing money or applying for a credit card, one of the most confusing numbers that will pop up is the Annual Percentage Rate, or APR.

*What does this number signify, and what is the calculation that goes into it? *

Suppose you lend your friend $300 for a year at 10% interest. At the end of the year your friend will owe you $300 (initial amount) + (300 x 10% interest) = 300 + 30 = $330. Now, 30/300 = 0.10, so the APR is 10%. This is a one-year loan at an interest rate of 10% and an APR of 10%. Notice that the APR is the same as the interest rate because you didn't charge your friend any fees other than interest.

Suppose you added a $10 "processing fee" on top of your interest. In this scenario, you'll be lending your friend $310. With the same 10% interest, your friend will owe you $310 (initial amount) + (310 x 10% interest) = 310 + 31 = $341. 31/300 = .103, so the APR is **10.3%** and the interest rate is 10%.

**14.4%**.

Lenders are required to provide you with the terms of your financing, which includes your interest rate and APR. Most providers will give you a range of both - for example, you'll see an advertisement for a loan that makes a note somewhere: "actual rates may vary depending on credit factors. Interest rates range from 7.70% - 14.95%."

For some types of loans, you'll need to be wary of **teaser rates **where lenders state that you will have a low interest rate or APR (sometimes as low as 0%), but after your "introductory period" your rate will rise significantly.

As with any large financial decision, make sure you ask the right questions before making a final choice.

*Originally published October 9, 2017.*