What is the purpose of the APR formula?

The purpose of the APR (Annual Percentage Rate) formula is primarily to evaluate loan costs. The APR provides a standardized measure that helps borrowers understand the total cost of borrowing on a loan, including the interest rate and any associated fees or costs over the term of the loan. By expressing this cost as an annual rate, it allows borrowers to easily compare different loan options.

When looking at the implications of the APR, it takes into account not just the interest charged but the total costs involved in obtaining the loan, which can include various fees and other charges that might affect the overall repayment amount. This makes it an essential tool for consumers to assess and compare loans, ensuring transparency in lending.

Other options, while related to finance, do not align with the primary purpose of the APR. Future value calculations focus on determining how much an investment will grow over time, effective interest rates pertain to the actual interest earned or paid after considering compounding, and summarizing total payments deals more with the complete payment schedule rather than the cost of borrowing itself.