Travis obtained a $1,000 loan to be paid back at the end of one year.The lender quoted him an 11 percent rate of interest and said the finance charges would be figured according to the discount method.Which of the following statements is correct regarding this loan?

Question

Quizplus · Accepted Answer

Under the discount method, the interest (finance charges) is calculated upfront and subtracted from the loan amount before it is given to the borrower. Therefore, Travis will not receive the full $1,000, but rather $1,000 minus the interest charges. Since the interest is calculated on the full amount but the borrower receives less than the full amount, the effective annual percentage rate (APR) is higher than the nominal rate of 11 percent.

Travis Obtained a $1,000 Loan to Be Paid Back at the End