We need more populism in this country, and fewer “internal” decisions.

]]>An example of the difference that occurs, with high periodic rates and short periods, is a loan described in the February issue of Consumer Reports, where a school principal took-out a $400 loan to be repaid with $120 in interest in 16 days. The NAPR, in accordance with Regulation Z of the TILA, is the rate for a period times the number of periods in a year (120/400)*(365/16) = 684%. The mathematically-true APR is the compounded, EFFECTIVE (a named steeped in history) APR (EAPR), the rate for a period compounded (“^”) for the number of payment periods in a year (((1+(120/400))^(365/16))-1) = 39,650%. On the Nominal APR, TILA states the tolerance of accuracy of this “closed-end’ (a stated due date) loan as 1/8th% (0.125%). In this example the Effective APR is 311,728 of those 1/8th%s from the Nominal APR (39,650%-684%)/0.125% … astronomically wrong. In 1968, when interest rates were low (5%) and periods longer (monthly) the Nominal and Effective APRs were very close. In this case the EAPR is 58 times greater than the NAPR (39,650%/684%).

Now, you may find the above unbelievable, so please check with a teacher of graduate finance, especially a PhD who does not have any obligations to any financial organization or government entity. A $4.95 LeWorld hand-held calculator at Wal-Mart has a compounding function. The Truth in Savings ACT uses the EAPR and calls it the Annual Percentage Yield (APY). To change TILA to the truth, the words “multiplied by” should be changes to “compounded for”. ]]>