Question

Which of the following statements about annual percentage rate (APR) and effective annual rate (EAR) are not true?

1-The annual percentage rate (APR) is considered a more accurate measurement of what you will actually pay.
2-Lenders are legally required to show potential borrowers the effective annual rate (EAR) on any loan offered.
3-The difference between APR and EAR is not that large.
4-None of the above are untrue statements.

Answer 1

The APR is not a more accurate measure than the EAR; lenders must disclose APR but not necessarily EAR; and the difference between APR and EAR can be significant, making the first two statements untrue while the third statement underestimates the potential difference.

Step-by-step explanation:

Among the statements about annual percentage rate (APR) and effective annual rate (EAR), a couple are not true. Firstly, the APR is not considered a more accurate measurement of what will actually be paid; in fact, the EAR provides a more accurate depiction because it includes the effects of compounding interest within a year. Secondly, lenders are generally required to disclose the APR, not the EAR, though disclosing the EAR can be seen as a good practice to give borrowers a clearer understanding of the full cost of the loan.

Furthermore, the difference between APR and EAR can be quite significant, especially for loans with high-interest rates or for loans where interest compounds on a frequent basis. Hence, the third statement is also incorrect as it does not acknowledge that the difference can indeed be large in certain cases.