# Loan commercials: Why two rates given? **URL:** \ **Category:** Factual Questions\ **Created:** [January 7, 2003, 8:29pm UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180 "2003-01-07T20:29:58Z")\ **Posts on this page:** 6\ **Page:** 2
**Author:** ![aahala](https://avatars.discourse-cdn.com/v4/letter/a/a88e4f/32.png) [@aahala](https://boards.straightdope.com/u/aahala)\ **Post date:** [January 8, 2003, 11:39am UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180/21 "2003-01-08T11:39:33Z")
If there is no interest upon interest, that is, if the required payments collect interest, then there is no compounding effect as far as APR. So in that regard, the cite given from Stephen Kellison is correct. Things may have changed in the last decade, but I have never seen interest compounding feature(assuming payments are made as required) on a mortgage loan and I have seen more than 10,000. Sometimes commerical loans do have an interest compounding feature, but they aren’t covered by T-I-L, so there’s no APR. ---
**Author:** ![sailor](https://avatars.discourse-cdn.com/v4/letter/s/a587f6/32.png) [@sailor](https://boards.straightdope.com/u/sailor)\ **Post date:** [January 8, 2003, 12:29pm UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180/22 "2003-01-08T12:29:18Z")
aahala, mortgages compound monthly. At any rate, I am finding plenty of contradictory information the more I look so it seems correct that many places just calculate the monthly APR and then multiply by 12. Like [This calculator](http://www.efunda.com/formulae/finance/apr_calculator.cfm). The problem with that is that you can only make meaningful comparisons between loans which have the same compounding periods. In this case the period is set to one month. There are mortgage loans with 24 payments per year and if you compare one with the 12 payments/year loan, then you _must_ take the compounding into account. But so long as both loans being compared have the same period duration, then, obviously the compounding can be ignored and the comparison is still meaningful. But once you are comparing different period durations you have to take it into account. ---
**Author:** ![aahala](https://avatars.discourse-cdn.com/v4/letter/a/a88e4f/32.png) [@aahala](https://boards.straightdope.com/u/aahala)\ **Post date:** [January 8, 2003, 12:42pm UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180/23 "2003-01-08T12:42:08Z")
sailor, I’m indifferent to whether you call it compounding or not. Relative to the APR question. Say there were none of those “finance charges” as defined by Reg Z. Then the note amount and the defined term “amount financed” would be the same. Say you had a choice of mortgages like this at a note rate of 12%. 20 years, payments figured monthly or annually, so that each time you made a payment you would be paying interest for the prior period. Your total payments on the monthly loan would be quite a bit less as each time you made a payment, interest would be recalculated on the unpaid balance. So in that sense, there is compounding. Twelve months payments would be less than a single annual payment. But under this senario, what is the APR? In both cases, the APR would be the note rate, 12%. ---
**Author:** ![sailor](https://avatars.discourse-cdn.com/v4/letter/s/a587f6/32.png) [@sailor](https://boards.straightdope.com/u/sailor)\ **Post date:** [January 8, 2003, 1:21pm UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180/24 "2003-01-08T13:21:26Z")
Yes, I understand that words do not have strict, universally accepted, meanings and there is no substitute for understanding all the terms of the contract. ---
**Author:** ![zut](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/zut/32/2875_2.png) [@zut](https://boards.straightdope.com/u/zut)\ **Post date:** [January 8, 2003, 5:11pm UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180/25 "2003-01-08T17:11:22Z")
> [@](#): > > \*Originally posted by sailor \* > And, I do not believe APR is defined differently for different kinds of loans. I’d like to see some proof to the contrary. OK, how about [this page](http://www.state.nh.us/nhdoj/Consumer/til.html), describing “closed-ended” types of loans, which include mortgages: > [@](#): > > The **Annual Percentage Rate or APR**. This is a complex calculation designed to provide a uniform “true cost of credit” which the consumer can use to comparison shop. Basically, the APR assumes that the total finance charge (which, remember, is equal to total interest on the debt plus other charges, such as points and fees) is paid in equal installments over the term of the loan and then calculates the amount paid each year as a percentage of the amount financed. This number will almost always be higher than the so-called base interest rate on a loan. > > NOTE: _A different APR calculation applies to open-ended transactions such as credit cards._ The details on that are covered in the section [CREDIT CARDS](http://www.state.nh.us/nhdoj/Consumer/car.html). [My italics] This definition matches what I stated above. Jumping to the section on credit cards, they mention: > [@](#): > > the so-called **nominal Annual Percentage Rate (APR)**, which is computed by multiplying the periodic interest rate by the number of periods in a year to arrive at an annual rate a definition which matches your credit card data above: “I checked one of my credit cards and the interest compounds daily: .02836%(Daily) = 10.350% APR” (0.02836)\*365 = 10.3514. However, neither definition appears to match your answer above. ---
**Author:** ![aahala](https://avatars.discourse-cdn.com/v4/letter/a/a88e4f/32.png) [@aahala](https://boards.straightdope.com/u/aahala)\ **Post date:** [January 8, 2003, 6:01pm UTC](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180/26 "2003-01-08T18:01:46Z")
Bob and Tom are discussing Bob’s new home loan. Bob: I got a loan for $100,000 and had to pay $1,000 upfront Tom: That’s points, that’s a ripoff. Bob: Not reactly, the lender took it off my amount financed! Tom: So you really borrowed $99,000 and that’s what you’re paying interest on. Bob: Not exactly. My amount financed is $99,000 but the amount I borrowed was $100,000.00. Tom: And what’s your rate? Bob: Well, my note rate – that’s the rate interest will be figured on – is 9%. But my annual percentage rate is 9.19%. Tom: Somebody needs to report them to the feds, they must be lying to you. Bob: No, that’s federal truth-in-lending. [Previous page](https://boards.straightdope.com/t/loan-commercials-why-two-rates-given/147180.md?page=1)