Future Business Leaders of America (FBLA) Business Calculations Practice Test

How does the APR compare to the simple interest rate for installment payments?

1. Lower than the simple interest rate

2. The same as the simple interest rate

3. Higher than the simple interest rate

4. Not applicable on installment payments

The correct answer is: Higher than the simple interest rate

The annual percentage rate (APR) is typically higher than the simple interest rate for installment payments because APR encompasses not just the interest charged on the principal amount over the period but also includes any additional fees or costs associated with the loan. In an installment loan, payments are made over time, and the APR reflects the actual cost of borrowing on a yearly basis. This means it provides a more comprehensive view of the borrowing costs than just the simple interest rate, which only considers the interest itself based on the principal amount borrowed. As a result, since APR includes both the interest and any additional charges factored into the total cost of borrowing, it tends to elevate the overall cost compared to a straightforward simple interest calculation, leading to a higher numerical value for APR. This is critical for borrowers to understand as it influences their long-term costs and helps in making informed financial decisions.