A _______ APR will result in a _______ true cost of credit.

Question

A _______  APR will result in a _______ true cost of credit.

BlackTom AI · Accepted Answer

Question restatement: A _______ APR will result in a _______ true cost of credit.

Option provided: "lower; lower."

Explanation of the option:
- The statement ties the level of APR to the true cost of credit. APR (annual percentage rate) is a standardized measure that expresses the yearly cost of borrowing as a percentage, including interest and certain origination fees. When the APR is lower, all else being equal, the annualized cost of borrowing is reduced, which tends to lower the true cost of credit over the term of the loan.
- This makes intuitive sense: a smaller percentage rate applied to the outstanding balance over time translates into smaller interest charges per period, assuming the repayment schedule and fees are held constant.

Why this option is reasonable within typical lending scenarios:
- If two loans are identical in principal, term, fees, and payment schedule except for the APR, the loan with the lower APR will typically incur less total interest expense and thus a lower true cost of credit.
- The concept of true cost of credit is closely linked to both the stated rate and the included charges; a lower APR often indicates lower overall borrowing costs, provided that fees and other terms do not offset the reduction.

Considerations and potential caveats:
- It is important to compare APRs that include the same set of fees for a fair comparison. A loan with a lower APR but higher origination fees could have a comparable or even higher true cost of credit than a loan with a higher APR but lower fees.
- The magnitude of savings from a lower APR also depends on the loan amount and term. Shorter-term loans amplify the impact of the rate, while longer terms accumulate more interest, making APR differences more pronounced.
- If the borrower makes extra payments or pays off early, the effect of APR on the true cost can be further affected, since some loans may have prepayment penalties or different amortization effects.

Overall assessment:
- The statement that a lower APR will result in a lower true cost of credit is generally correct under standard lending conditions where fees are comparable and terms are otherwise held constant. In contexts where fees differ substantially, one must examine the full cost of credit rather than APR alone, but the core relationship remains that reducing the APR tends to decrease the true cost.

FIN 205 B Module 6 quiz: credit and lending

A _ APR will result in a _ true cost of credit.

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