Question

What are the characteristics of an annual percentage rate? Check all that apply.

It can change over time for certain kinds of loans.
It is the interest charged each year for a loan.
It requires the borrower to pay all the principal at once.
It can be reduced to reflect the borrower’s credit history.
It has little impact on the amount the borrower must repay.

Answer 1

Correct answers:
- It can change over time for certain kinds of loans. (True — APR can be variable for adjustable-rate loans.)
- It is the interest charged each year for a loan. (Effectively true — APR expresses the annual cost of borrowing as a percentage; note it often includes fees as well as interest, so it’s not always just the nominal interest rate.)
- It can be reduced to reflect the borrower’s credit history. (True — lenders typically offer lower APRs to borrowers with better credit.)

Incorrect:
- It requires the borrower to pay all the principal at once. (False — that describes a lump-sum or balloon payment, not APR.)
- It has little impact on the amount the borrower must repay. (False — APR directly affects the total cost of borrowing.)