Because interest compounds, the annual percentage rate formula will overstate the true interest cost of a loan.

Question

Quizplus · Accepted Answer

The Annual Percentage Rate (APR) is designed to represent the actual yearly cost of a loan, taking into account the interest rate, along with any fees or additional costs associated with the loan. It does not overstate the interest cost; rather, it aims to provide a more accurate reflection of the loan's true cost compared to the nominal interest rate alone.

Because Interest Compounds, the Annual Percentage Rate Formula Will Overstate