What does the Annual Percentage Rate (APR) represent in the context of a 30-year loan?

• A. The total amount of interest paid over the entire 30-year period
• B. The monthly payment amount required to repay the loan in 30 years
• C. The yearly cost of borrowing expressed as a percentage, including interest and certain fees
• D. The principal balance remaining after 30 years

Answer: (C)

Verified step by step guidance

1. Understand the concept of Annual Percentage Rate (APR): APR represents the yearly cost of borrowing money, expressed as a percentage. It includes not only the interest rate but also certain fees associated with the loan.
2. Recognize that APR is different from the interest rate: While the interest rate reflects the cost of borrowing based solely on the loan amount, APR provides a more comprehensive view by incorporating additional costs such as origination fees or closing costs.
3. Relate APR to the loan term: In the context of a 30-year loan, APR helps borrowers understand the annualized cost of borrowing over the entire loan term, making it easier to compare different loan offers.
4. Clarify what APR does not represent: APR does not indicate the total amount of interest paid over the loan term, the monthly payment amount, or the remaining principal balance after 30 years. These are separate calculations.
5. Use APR to make informed decisions: Borrowers can use APR to compare loans with similar terms and amounts, ensuring they choose the option with the lowest overall cost of borrowing.