# What is an interest rate? (with photos)

The interest rate charged on a credit card is expressed as an annual percentage rate.

Those in the money lending business have the legal right to charge borrowers an additional fee for their services. For example, if Jim borrows \$100 US dollars (USD) from Jeff, that money would be considered the “principal” amount of the loan. Jeff can ask Jim to pay back the principal plus \$10, which would be considered an “interest” payment. When dividing the interest amount of \$10 USD by the principal amount of \$100 USD, the result is a percentage called the interest rate. In this case, 10 divided by 100 results in an interest rate of 10%.

Interest is charged at a fixed or flexible rate on the money borrowed until the debt is paid off.

The interest rate on a loan is usually calculated as an annual amount, even if the terms of the loan require a different repayment schedule. Vehicle loans are often advertised as having an annual percentage rate (APR) of 2.9%, even though the actual payments are spread over 5 years. This rate indicates that for every \$1,000 borrowed toward the price of the car, the lender will receive an additional \$29 in interest payments. This amount is added to the borrower’s monthly installments.

Lenders charge borrowers interest for using the funds.

An interest rate expressed as an annual percentage can help determine whether a particular lender’s terms are reasonable. Payroll lenders, for example, may charge a flat fee for a short-term loan due upon receipt of the borrower’s next paycheck. Expressed as a surcharge, this interest payment may not seem excessive; maybe a \$50 interest payment on a \$250 emergency loan. But calculated as an annual interest rate, the result is a relatively high 20% APR. Some short-term loans have an annual fee of 150% or more if the loan is not fully repaid and interest accrues daily or monthly.