Final answer:
A smaller APR results in lower interest payments because APR reflects the true cost of borrowing, including fees and costs. A lower APR means less total interest paid over the loan's life, influenced by factors such as the borrower's creditworthiness and market interest rates.
Step-by-step explanation:
All else equal, a smaller Annual Percentage Rate (APR) results in lower interest payments. APR is the annual rate charged for borrowing or earned through an investment, and it includes any fees or additional costs associated with the transaction, making it a more accurate reflection of the true cost of borrowing than the nominal interest rate.
Therefore, if a borrower has an APR that is lower, it generally means that the overall amount of interest paid over the life of the loan will be less than it would be with a higher APR, assuming all other factors are equal. Factors such as creditworthiness, market interest rates, and the borrower's financial situation can also influence the APR offered by lenders. For example:
- A borrower with a history of late payments is seen as riskier, potentially leading to a higher APR.
- If market interest rates have risen, a loan with a lower interest rate is less attractive, which can influence the overall APR.
- On the other hand, if the borrower is a profitable firm, it may be able to secure a loan with a lower APR due to its perceived ability to repay.
- Finally, if market interest rates have fallen, existing loans with lower interest rates may be valued higher, potentially leading to refinancing opportunities at a lower APR.