As I understand it the Annual Percentage Rate (APR) formula does not take compounding into account. It is, in effect, a nominal rate.

Why is this? I thought that APR was designed to allow consumers to compare products from different financial institutions as best as is possible. How does excluding compounding help this aim?

  • You may be thinking of APY (annual percentage yield), which is what allows you to compare offerings with different rates, terms, and fees.
    – chepner
    Aug 7, 2020 at 21:56
  • 1
    APR (in the US) is an anachronism, left over from the days before computers. See money.stackexchange.com/a/124507/11768 : "The "Truth in Lending Act" passed in 1968 did not incorporate the mathematically-true annual percentage rate, because the true calculation used compounding (sometime fraction compounding), which was not readily available." i.e. difficult to calculate without a pocket calculator. Aug 8, 2020 at 19:02


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