Future Business Leaders of America (FBLA) Business Law Practice Exam

What is the annual percentage rate (APR)?

1. The total cost of a loan over its term

2. The true interest rate of a loan expressed annually

3. The minimum interest rate allowed by law

4. The rate of interest charged for a mortgage

The correct answer is: The true interest rate of a loan expressed annually

The annual percentage rate (APR) is defined as the true interest rate of a loan expressed annually. It provides borrowers with a standardized way to understand the cost of borrowing, including not just the interest rate, but also various fees and costs associated with the loan. This comprehensive measure allows consumers to compare different loan products easily, as it takes into account the overall cost of borrowing rather than just the nominal interest rate. APR is significant because it helps ensure transparency in lending and enables borrowers to make informed decisions based on a clear understanding of the total cost associated with a loan. By expressing this cost on an annual basis, APR helps individuals gauge how much they would pay over the course of a year, facilitating better financial planning and comparison shopping among lenders. The other options do not fully capture the essence of what APR represents. For example, while the total cost of a loan over its term is important, it does not specify how costs are calculated annually, which is crucial for understanding APR. Similarly, a minimum interest rate allowed by law relates to usury laws but does not define the APR itself. The rate of interest charged for a mortgage, while it may influence the APR, is not synonymous with it, as APR includes fees and other costs beyond just the interest