# interest rate

There are many more periods over which to spread the principal, which makes the payment smaller, but there are just as many periods over which to charge interest at the same rate, which makes the total amount of interest paid much greater. Had the customer self-financed, a discounted sales price may have been accepted by the vendor; in other words, the customer has received cheap financing in exchange for paying a higher purchase price, and the quoted APR understates the true cost of the financing. However, using an EAR of For a fixed-rate mortgage , the APR is thus equal to its internal rate of return or yield under an assumption of zero prepayment and zero default.

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This information is typically mailed to the borrower and the APR is found on the truth in lending disclosure statement, which also includes an amortization schedule. Then in the s, auto makers and providers of some other durable goods began to exploit a loophole in the Act and its implementing regulations.

APRs calculated with the reduced, or eliminated, finance charge became the "below market rate" and "Zero percent APR' loans that were commonly advertised for the next 30 years. The "rebate" is the hidden finance charge, reclassified to car price [ citation needed ]. Auto makers have been aided in this ongoing consumer deception by the regulators who administer TILA. The current form of disclosure under TILA seems designed specifically to support the auto makers' deceptive scheme including the classification of the "rebate" as "down payment," an oddity seemingly unrelated to the basic scheme for understating APRs [ citation needed ].

Administration of TILA was recently transferred to the new Consumer Finance Protection Bureau which may give cause for hope of reform in the Act and its administration that will restore the consumer protections intended when TILA was enacted.

A specific clause of this act refers directly to APR disclosure on mortgages. It states, if the final annual percentage rate APR is off by more than 0. The calculation for "close-ended credit" such as a home mortgage or auto loan can be found here. For a fixed-rate mortgage , the APR is thus equal to its internal rate of return or yield under an assumption of zero prepayment and zero default. For an adjustable-rate mortgage the APR will also depend on the particular assumption regarding the prospective trajectory of the index rate.

The calculation for "open-ended credit" such as a credit card, home equity loan or other line of credit can be found here. In this equation the left side is the present value of the draw downs made by the lender and the right side is the present value of the repayments made by the borrower.

In both cases the present value is defined given the APR as the interest rate. So the present value of the drawdowns is equal to the present value of the repayments, given the APR as the interest rate. Note that neither the amounts nor the periods between transactions are necessarily equal.

For the purposes of this calculation, a year is presumed to have days days for leap years , 52 weeks or 12 equal months. As per the standard: In the Netherlands the formula above is also used for mortgages. In many cases the mortgage is not always paid back completely at the end of period N , but for instance when the borrower sells his house or dies. In addition, there is usually only one payment of the lender to the borrower: In that case the formula becomes:.

If the length of the periods are equal monthly payments then the summations can be simplified using the formula for a geometric series. These rates are all equivalent, but to a consumer who is not trained in the mathematics of finance , this can be confusing.

The APR does not necessarily convey the total amount of interest paid over the course of a year: In the case of a loan with no fees, the amortization schedule would be worked out by taking the principal left at the end of each month, multiplying by the monthly rate and then subtracting the monthly payment. This also explains why a year mortgage and a year mortgage with the same APR would have different monthly payments and a different total amount of interest paid.

There are many more periods over which to spread the principal, which makes the payment smaller, but there are just as many periods over which to charge interest at the same rate, which makes the total amount of interest paid much greater. In addition the APR takes costs into account. The APR concept can also be applied to savings accounts: Suppose that the complete amount including the interest is withdrawn after exactly one year.

The APR can also be represented by a money factor also known as the lease factor, lease rate, or factor. The money factor is usually given as a decimal, for example. To find the equivalent APR, the money factor is multiplied by A money factor of. For a leasing arrangement with an initial capital cost of C , a residual value at the end of the lease of F and a monthly interest rate of r , monthly interest starts at Cr and decreases almost linearly during the term of the lease to a final value of Fr.

This amount is called the "monthly finance fee". Despite repeated attempts by regulators to establish usable and consistent standards, APR does not represent the total cost of borrowing in some jurisdictions nor does it really create a comparable standard across jurisdictions. Nevertheless, it is considered a reasonable starting point for an ad hoc comparison of lenders. Credit card holders should be aware that most U. Despite the word "annual" in APR, it is not necessarily a direct reference for the interest rate paid on a stable balance over one year.

The more direct reference for the one-year rate of interest is EAR. As an example, for a common credit card quoted at Note that a high U. While the difference between APR and EAR may seem trivial, because of the exponential nature of interest these small differences can have a large effect over the life of a loan.

However, using an EAR of Some classes of fees are deliberately not included in the calculation of APR. Because these fees are not included, some consumer advocates claim that the APR does not represent the total cost of borrowing. Excluded fees may include:. Lenders argue that the real estate attorney's fee, for example, is a pass-through cost, not a cost of the lending. In effect, they are arguing that the attorney's fee is a separate transaction and not a part of the loan.

Consumer advocates argue that this would be true if the customer is free to select which attorney is used. If the lender insists, however, on using a specific attorney, the cost should be looked at as a component of the total cost of doing business with that lender. This area is made more complicated by the practice of contingency fees — for example, when the lender receives money from the attorney and other agents to be the one used by the lender.

Take rate refers to the percentage of visitors who took interest in an action but did not actually follow through with that action. Say you have a link on your home page for visitors to download a white paper. Clicking that link leads to a separate page with download instructions, etc. Visitors who click the link to go to the download page count towards your take rate. Some will not actually download the white paper.

Only the people who do are counted towards your conversion rate. So, if you have 3, home page visitors and go to the download page, your take rate is If download the white paper your conversion rate is 6. Now you know two things: You know the rate at which visitors respond to the link on your home page, and you know the rate at which visitors complete the download once they reach your download page from that link.

You could also say each is a conversion: People who click the link to go to the download page converted—because you wanted them to click the link—and people who completed a download once on the download page also converted.

If multiple actions are required, measuring each conversion makes sense. Just keep in mind conversion rate, viewed in the aggregate, can be misleading. Larry feels true conversion starts by measuring intent. But what if only ten of those visitors intended to make a purchase? The rest were looking for warranty information, or maintenance advice, or just wanted to know your store hours.

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