Posted by ReneeK/MI on March 26, 2009, 3:43 am, in reply to "Re: Except ... but ... it is.... as much as it can be."
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I’m sincerely intending this as a professional discussion, Craig – we don’t often get to engage in such meaty topics, and I enjoy shop-talk (i.e. I’m not ‘arguing’ but discussing!)
I understand (of course) that the APR includes interest and loan costs, and that it is “expressed as an annual rate” as opposed to a daily, weekly or monthly rate – which you are correct in correcting, technically I believe this is “annualized”, but I certainly am not going there with the average consumer.
I also think the APR is a pretty useless tool for a couple reasons – one, because it’s so difficult to understand and two, because all things need to be ‘equalized’ for a true comparison – and the rules don’t ensure that. For example, not all lenders include the same fees (subjective interpretation of the TILA), and not all lenders use identical methodology for other calculations (360/365 days, interest compounding daily/weekly/monthly, differing amortization methods allowed in APR calculations, etc).
Real world calculations (all other things being equal):
100,000 loan w/ 5% interest, $3k in costs, 30 yr fixed: APR is 5.262
Same loan, 20 year fixed: APR is 5.356. Again at 15 years fixed, the APR is 5.452. The term will always affect the APR, because it is a part of the calculation formula.
While consumers need to consider how long they may intend to hold the loan when comparing products, the APR does not. The APR calculations are amortized over the entire loan term, re-calculated and expressed as an annual (annualized!) rate. (The actual formulas allowed are included in the TILA.) I’m pretty curious where you’re getting the 7 year calculations?
All of this being the reason behind my initial statements – the APR could be picked apart and discussed for … well, forever, and my explanation to consumers is/was admittedly highly simplified, BUT I stand by my understanding of it being correct in simplified concept and not at all misleading to the average consumer.
Engaging topic, and I do hope you also appreciate the discussion and won’t personalize it. =)
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