Most people think interest is interest. In fact, you could have two loans that charge the same interest rate , and yet charge two different amounts of interest. Two factors affect the cost of borrowing:
1. The annual percentage rate ( APR )

* Includes all loan service costs and interest.
* May therefore be higher than the interest rate you see in the loan contract.

A lender must tell you the APR before you sign a loan agreement. Sometimes the lender for a car or other type of loan will advertise a low APR to win your business. It's a way of saying you can really trust the deal they are offering, and that you don't have to worry about hidden costs.

To understand the APR of a loan, make sure you ask:

* How much total interest will I pay?
* Are there any fees or extra charges?
* Are there any other costs, including loan insurance ?

2. How the lender calculates the interest

The method they use can really change the cost of borrowing. For example, interest on a mortgage is calculated in a different way than interest on a credit card .

How does interest work on mortgages and other loans?

* Most mortgages and some loans use the remaining balance method.
* The lender just multiplies the interest rate by the principal balance at the start of each term .
* You don't pay interest on any principal you have repaid.

How does interest work on credit cards?

* In some cases, you have to pay off all of your charges each month. If you don't, you'll pay interest on the full balance that you owe.
* Most cards ask only for a minimum payment each month - often 5% of the current balance or $10, whichever is more. You pay interest on the unpaid balance.
* Some cards give you a grace period when you borrow. If you pay back everything within that time, you won't have to pay any interest that month.
* Other cards charge interest from the day you made each purchase, until you pay in full.
* In some cases, you pay interest on your daily balance, or your average daily balance.
* With other cards, you pay interest on your highest monthly balance.

Remember: The interest rate you see in the ads doesn't tell the full story.

To understand the total cost of borrowing, you need to know the APR and any extra charges. You also need to understand how interest is being charged.