In article
<6d0865b5-de2f-4a34-9b1f-6e20353ff353@[EMAIL PROTECTED]
>,
jgharston <jgh@[EMAIL PROTECTED]
> wrote:
> Back in school 30-odd years ago I was taught that monthly
> interest on a loan/investment is the 12th root of the annual
> interest, ie: loan=loan*((1+apr/100)^(1/12)).
>
> Doing a bit of checking for some source code I find
> everybody saying that monthly interest is 1/12 of the
> annual interest, ie: loan=loan*((1+apr/100)/12).
>
> Checking my mortgage statement shows my bank using
> 1/12 not root12. Has something changed in the last 30
> years? Can banks not work out 12th roots any more, or
> were my teachers wrong?
In consumer law, "APR" is *defined* to be the monthly interest rate * 12.
It thus differs from the true effective annual interest rate, which as
you correctly imply is ((1+monthlyRate/100)^12)*100-100.
Thus the "APR" systematically understates the true annual interest rate,
which is nice for the lenders. Also, most borrowers wouldn't understand
an exponential.
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