Question

When calculating the Annual Percentage Rate, it is important to consider
a. interest charge.
b. amount of loan.
c. term.
d. all of the above.

Answer 1

When calculating the Annual Percentage Rate, it is important to consider all the above.

Option d

Explanation:

APR provides for a clear view of the actual cost of the borrowing that one might undertake. It gives an annualized value of not just the interest charged but also include the fee(s), if any, related to the borrowing directly, giving a holistic view of the expense related with the borrowing.  

APR on different types of borrowings is calculated differently. For instance, in calculating APR for a loan, the basic formula is:  

$APR = 2 \times \frac{\frac{Number\ of\ Payments}{Year} \times Total\ Finance\ Charges }{Original\ Loan\ Proceeds\ \times Total\ Number\ of\ Payments\ +\ 1}$

The purpose of APR is to make the choice of the borrower easier and economically more feasible between whether he/she wants to go for the borrowing with higher fee and lower rate or higher rate and lower fee.