Despite the mellifluous sounding title, “Truth in Lending,” that named Act of 1968 DOES NOT use the mathematically-true method of calculating the mathematically-true Annual Percentage Rate. While taking a graduate course in Finance in 1974, I observed the calculation (by the author of the textbook, Robert Willard Johnson [1904-1986]) of the Annual Percentage Rate on taking a discount of the popular 2%10,net30. That meant if the invoice was paid by the 10th of the month, then 2% of the invoice could be deducted. After that the whole amount, 100%, must be paid on or before the 30th of the month. Without mentioning why, the author used the Nominal, Simple-Interest method (SIAPR formula): the rate for a unit-period multiplied by the number of unit periods in a year. That is calculated (using Excel mathematical symbols: add +, subtract -, multiply *, divide /, compound ^, convert a whole numbers to a percent 100) as ((100/(100-2))-1)*365/(30-10)*100, which equals 37.14%. The mathematically-true APR is the Compound (CAPR) is 44.59%, calculated as ((100/98)^(365/(30-10))-1)*100. I have the letter Johnson wrote a letter to me stating the simple-interest method was used because of the “cost of computing.” I assume he meant that in 1976 it was difficult to perform computing. I know in 1974 on a IBM punch card the symbol was **. The HP 35 came out in the mid 1970’s … at a cost of probably then of $300. Now a LeWorld pocket calculator at Wal-Mart for $4.95 has compounding. Also, now, ever decent cell-phone has a compounding function in its math icon. An example of the disparity in the SIARP and CAPR would be a payday loan. A 14-day post-dated check for $115 is given to the payday lender to borrow $100. The current SIAPR is 391.07% calculated as (15/100)*(365/14)*100. The mathematically-true APR is the CAPR which is 3723.66% calculated as (((15/100)+1)^(365/14)-1)*100. TILA has a tolerance of 0.125% in expressing the APR. The CAPR is not merely slightly over the 0.125%, it is 26,660 of those tolerances, calculated as (26,660%-391.075%)/0.125% Deep-down in my heart, I don’t think Mr. Cordrays staff will give him my comments. Google my name, A F Bob Blair Jr, and find 30 - 40 similar comments by me.
Posted on: Sun, 15 Sep 2013 12:21:05 +0000
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