Chapter 3: Managing Debt
Imagine you want to borrow some money — maybe for a car, school, a house, or even a personal loan. The lender isn’t handing over that cash as a free favour. They’re charging you for the privilege of using their money.
That charge is called interest. It’s the extra amount you pay on top of the money you borrowed (the “principal”). Interest is always shown as a percentage. For example, if you borrow $20 at 5% interest, you’ll need to pay back the $20 plus an extra $1 (because 5% of $20 is $1).
How interest is shown
Most loans or credit cards don’t just say “we charge 5% interest.” Instead, you’ll see something called the Annual Percentage Rate (APR). This is the total cost of borrowing, shown as a yearly percentage. It includes the interest rate itself and any extra fees the lender charges.
Even though APR is shown as a yearly rate, most loans require monthly payments. That means the interest and fees are divided up over the year (and sometimes calculated daily — more on that in a moment).
Quick note: People often use “interest rate” and “APR” interchangeably. We sometimes do this too, just to keep things simple.
Fixed vs. Variable APR
Fixed APR: Your rate stays the same for the entire loan. This makes your payments predictable. For example, if you borrow $10,000 at a fixed APR of 5% for three years, you’ll be charged the same rate every year until it’s paid off. Many mortgages and car loans work this way.
Variable APR: Your rate can go up or down depending on changes in the economy. It may start lower than a fixed rate, but it can change at any time, which means your monthly payment can increase. Credit cards often have variable APRs.
Compound interest
Some loans — especially credit cards — use compound interest. This means interest is calculated not just on what you originally borrowed, but also on the interest that’s already been added. For example, your credit card company may calculate interest daily, adding it to your total balance, then charging interest on that new, higher total the next day. Over time, this can cause your debt to grow much faster, especially with high APRs (like 18% or more).
Promotional “0% interest” offers
Sometimes you’ll see ads that say “0% interest for 18 months!” These can be useful, but you need to read the fine print:
Introductory 0% APR: You pay no interest during the promo period, but once it ends, the regular APR kicks in and applies to any balance you still owe. This is common for new credit cards.
Deferred interest: This is trickier. Interest starts building from the day you make your purchase but is only waived if you pay the entire balance before the promo ends. If you’re even one day late or short on payment, you’ll be charged all the interest that’s been building since the purchase date. Retailers often use this for big-ticket items like furniture or electronics.
One more thing: these offers are usually only available to people with excellent credit, so not everyone will qualify. Always check the exact terms before signing up.
Understanding how interest works is key to making smart borrowing decisions. It’s not just about the percentage you see — it’s about how it’s calculated, how often it’s applied, and what it will cost you over time. In the next lesson, we’ll go deeper into identifying good debt versus bad debt, and how interest rates play into that picture.
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