Loan Officer Practice Exam

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What is the term for the interest rate stated on the financing instrument?

APR
Note rate
Effective rate
Discount rate

The correct answer is: Note rate

The term "note rate" refers specifically to the interest rate that is stated directly on a promissory note or loan agreement. It represents the rate at which interest accrues on the amount borrowed, serving as the initial measurement of the cost of the loan. This rate is essential for understanding the basic terms of a mortgage or loan and is used to calculate monthly payments. The note rate is distinguished from other terms such as APR (Annual Percentage Rate), which includes additional costs associated with borrowing, making it a broader measure of the total cost of financing. The effective rate, on the other hand, takes into account the effects of compounding, which can differ from the note rate depending on how often interest is calculated. Finally, the discount rate is used primarily in the context of present value calculations and does not directly relate to the interest charged on a loan. Thus, the note rate is the correct term for the interest rate explicitly stated in the financing instrument.