If a loan product changes and there is an increase in APR, what is one of the adjustments that may be made?

If a loan product changes and there is an increase in APR, what is one of the adjustments that may be made?

• A. Reduction in closing costs
• B. Prepayment penalty added
• C. Decrease of loan term
• D. Lower interest rate

Answer: (B)

When there is an increase in the Annual Percentage Rate (APR) for a loan product, one common adjustment that may occur is the addition of a prepayment penalty. This is implemented because lenders want to protect themselves from losing potential interest income. If a borrower pays off their loan early, the lender may not receive the full amount of interest expected over the life of the loan due to the higher APR. Therefore, to mitigate this risk, lenders might impose a prepayment penalty. This adjustment effectively disincentivizes borrowers from refinancing or paying off their loans ahead of schedule, ensuring that the lender still retains a level of income from the loan, even in the face of the increased APR. The other options presented do not directly correlate with the typical responses to a rise in APR and would not generally be implemented as adjustments under these circumstances.

When there is an increase in the Annual Percentage Rate (APR) for a loan product, one common adjustment that may occur is the addition of a prepayment penalty. This is implemented because lenders want to protect themselves from losing potential interest income. If a borrower pays off their loan early, the lender may not receive the full amount of interest expected over the life of the loan due to the higher APR. Therefore, to mitigate this risk, lenders might impose a prepayment penalty.

This adjustment effectively disincentivizes borrowers from refinancing or paying off their loans ahead of schedule, ensuring that the lender still retains a level of income from the loan, even in the face of the increased APR. The other options presented do not directly correlate with the typical responses to a rise in APR and would not generally be implemented as adjustments under these circumstances.