Which of the following statements about the Annual Percentage Rate (APR) is true?

Which of the following statements about the Annual Percentage Rate (APR) is true?

• A. APR is always lower than the interest rate
• B. APR is the same as the interest rate
• C. APR includes additional costs associated with borrowing
• D. APR can only be calculated after loan approval

Answer: (C)

The Annual Percentage Rate (APR) is a crucial concept in understanding the true cost of borrowing. It incorporates not just the interest rate on the loan but also additional costs associated with obtaining the loan, such as origination fees, closing costs, and any other charges that borrowers may incur. This comprehensive calculation allows borrowers to see the overall cost of the loan expressed as a yearly rate, facilitating better comparison shopping between different loan offers. The other statements inaccurately portray how APR works. For instance, APR is not always lower than the interest rate; in fact, it is often higher due to the inclusion of those additional costs. It is also not the same as the interest rate, as they measure different aspects of the borrowing cost. Lastly, stating that APR can only be calculated after loan approval is misleading; while the exact APR can be finalized once all specific costs are known, a preliminary APR estimate can often be calculated during the loan application based on the expected fees. Thus, the correct understanding of APR is critical for any potential borrower looking to make informed financial decisions.

The Annual Percentage Rate (APR) is a crucial concept in understanding the true cost of borrowing. It incorporates not just the interest rate on the loan but also additional costs associated with obtaining the loan, such as origination fees, closing costs, and any other charges that borrowers may incur. This comprehensive calculation allows borrowers to see the overall cost of the loan expressed as a yearly rate, facilitating better comparison shopping between different loan offers.

The other statements inaccurately portray how APR works. For instance, APR is not always lower than the interest rate; in fact, it is often higher due to the inclusion of those additional costs. It is also not the same as the interest rate, as they measure different aspects of the borrowing cost. Lastly, stating that APR can only be calculated after loan approval is misleading; while the exact APR can be finalized once all specific costs are known, a preliminary APR estimate can often be calculated during the loan application based on the expected fees. Thus, the correct understanding of APR is critical for any potential borrower looking to make informed financial decisions.