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I'm a tester working for a high cost, short-term loan credit company in the UK. Recently, the Financial Conduct Authority (FCA) issued a policy on statements which includes information on how they should be formatted. Currently, my client is showing the interest rate per annum but, from what I understand, they should be showing the interest rate as an annual percentage rate.

From what I can tell, there's a difference as APR takes transactions like disbursement fees and origination fees into account whereas the per annum amount does not.

So, is it a question of semantics? And would the APR amount be the same as a per annum amount?

Also, Google seems to think the interest rate per annum (IRPA) is similar to annual percentage yield but I don't think that's right - APY is a comparable figure for investment purposes whereas, in this case, IRPA is being used for credit.

Note: I've massively edited this question to give a bit more background but the question's the same.

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    Usually the words per annum are followed by compounded and then by a description of the frequency of compounding: quarterly or monthly or weekly or daily etc. In contrast, APR or annual percentage rate has a specific legal definition in the US, and somewhat different meaning elsewhere. – Dilip Sarwate Apr 10 '15 at 14:54
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APR is generally ambiguous, at least in the UK, and elsewhere I gather.

To be clear what is meant by APR, it should be specified whether it is Nominal APR (with a compounding interval, e.g. monthly, daily or infinitely) or it should be Effective APR.

Converting between Nominal and Effective APR is described here:-

Effective interest rate - Calculation (link)

For example, 10% Nominal APR compounded monthly is 10.4713% Effective APR

(1 + 0.10/12)^12 - 1 = 0.104713

and 10% Effective APR is 9.56897% Nominal APR compounded monthly

((0.10 + 1)^(1/12) - 1)*12 = 0.0956897

Finally, note 3 on the Wiki APR page (link) is quite illuminating:-

  • Source: webpage: US-Federal-Reserve-R1314

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. The result on expression of the APR on credit cards uses a Nominal (simple interest) method ... which can far from the truth. The Truth in Lending Act should be changed to the mathematically-true (EFFECTIVE) APR from the untrue (NOMINAL) APR, merely by changing the word in act from "multiplied by" to "compounded for".

"the true calculation used compounding ... which was not readily available." - I.e. in the days before pocket calculators, dividing by 12 to calculate a monthly repayment was a lot easier than taking the 12th root.

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APR stands for "Annual Percentage Rate", so yes, strictly speaking, it is synonymous with "percent per annum".

In the U.S., the term "APR" has become a legal term (as D.S. mentions in his comment). "APR" must includes the total annual price of a loan, including any fees. So some U.S. loans have slight differences between the stated interest rate and "APR".

While "% per annum" and "annual percentage rate" have the same meaning in English (or is that Latin?), APR is a more useful term to use when comparing loan products because "percent per annum" may just describe the loan interest and exclude some other fees.

  • So the difficulty is, the FCA (governing body here in the UK) have issued a policy document on statements which is incredibly difficult to read. So whereas my client is showing the interest rate per annum, I've interpreted (maybe incorrectly) to say that they should show the APR instead. Mathematically, there's a difference as APR takes transactions like disbursement fees and origination fees into account whereas the per annum amount, as far as i can tell, does not. I'll update the question to give a bit of background. Thanks for your info! – trashpanda Apr 10 '15 at 16:47
  • That's correct. Per that govt recommendation you need to tell the customer the APR as it actually affects their wallets, since in the end that is the only number which is real to them and can be reasonably easily compared to other products. – keshlam May 10 '15 at 17:44

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