Question

APR and EAR - Should lending laws be changed to require lenders to report EARs instead of APRs? Why or why not?

I need a detailed and well explained answer, thank you!

Answer 1

Annual percentage rate (APR) is a measure that attempts to calculate what percentage of the principal you’ll pay per period (in this case a year), taking every charge from monthly payments over the course of the loan, upfront fees, etc. into account.

APY differs from APR in that the latter takes only simple interest into account. APY incorporates the additional complication of compound interest: interest charged on the simple interest, which again distorts the numbers and increases a borrower’s obligations – or a saver's gains – beyond the standard simple interest rate.

Note that APY and EAR are identical. They represent the same quantity but are quoted by one name or the other depending on the circumstance. The expressions are two sides of the same coin, in much the same way that an accounts payable for one business is an accounts receivable for another. A credit card issuer, for example, would use the term EAR (effective annual rate) rather than APY, because it’s not good public relations to talk in terms of the “yield” that the cardholders’ payments are generating for the issuer.

The main difference between APR and EAR is that APR is based on simple interest, while EAR takes compound interest into account. APR is most useful for evaluating mortgage and auto loans, while EAR (or APY) is most effective for evaluating frequently compounding loans such as credit cards.

The EAR is always greater than the APR. The APR is equal to the EAR for a loan that charges interest monthly. ... The EAR, rather than the APR, should be used to compare both investment and loan options. The APR is the best measure of the actual rate you are paying on a loan.

The main difference between APR and EAR is that APR is based on simple interest, while EAR takes compound interest into account. APR is most useful for evaluating mortgage and auto loans, while EAR (or APY) is most effective for evaluating frequently compounding loans such as credit cards.