The album's title was influenced by Furtado's parents' immigration to Canada, "When I look at my old photo albums, I see pictures of their brand-new house, their shiny new car, their first experiences going to very North American-type places like Kmart. When you have that in your blood, you never really part with it – it becomes your own personal folklore." The album also displayed a diverse sound but with a more rock-oriented, acoustic approach. Furtado attributed the mellowness of the album to the fact that she was pregnant during most of its recording. "Saturdays" features vocals by Jarvis Church and "Island of Wonder" features vocals by Caetano Veloso.
It was announced on 11 November 2003 that Universal Music Group reached an agreement to acquire DreamWorks Records from DreamWorks SKG for "about $100 million". The purchase came at a time when the music business was "going through major changes" as it struggled to "counter falling sales and the impact of unofficial online music sales". Mo Ostin, the principal executive at DreamWorks Records, said: "Despite the challenges of the music business today, Universal is acquiring a wonderful asset and the sale will assure the strongest possible future for our artists". DreamWorks Records was folded into the Interscope Geffen A&M umbrella label in January 2004. Furtado's recording contract was then absorbed into Geffen Records.
Folklore received mixed reviews from critics. AllMusic's Stephen Thomas Erlewine stated that "[w]hile there are some interesting musical moments on Folklore -- enough to make it worth a listen -- the dogged seriousness and didactic worldview become a bit overbearing not long before the album is a quarter of the way finished, particularly since the fusion of worldbeat and adult alternative pop often seems heavy-handed."Entertainment Weekly gave a positive review stating that "exultant music goes on its merry, multicultural way". While Rolling Stone gave a negative review, calling Folklore "slick, multicultural hodgepodge" but "without a single as good as 'I'm Like a Bird.'" As she focused more on the songwriting, rather "than on frenetically switching genres five times in one song",BBC felt that it had "twice the originality" of her debut.The A.V. Club wrote that while "few tracks on Folklore stand out, the album hangs together agreeably..."
The album debuted at number eighteen on the Canadian Albums Chart with first-week sales of 10,400, and at number thirty-eight on the US Billboard 200 chart, selling 68,000 in its first week. According to Nielsen SoundScan, it had sold 425,000 copies in the US by August 2008. It was not as successful as Furtado's debut album, Whoa, Nelly! (2000), partly because of troubles at DreamWorks Records and the less poppy sound. It lacked promotion because DreamWorks was sold to Universal Music Group at the time of Folkore's release, and it spent only eleven weeks on the US Billboard 200 chart. In 2005, DreamWorks Records was shut down and many of its artists, including Furtado, were absorbed into Geffen Records. Furtado noticed that the album was particularly successful in Germany, where it reached the top 5 on the albums chart, and said, "Why do Germans love this album? I think I figured it out: It's so cerebral. It's great in its own way, but that's a different side."