I'm hoping someone can clarify this for me.
The model/example is this:
We lend an amount of 1498.50 (loan amount). Other fees total 39.95. The term of the loan is for 12 months. There is no interest per month, per se, but a 10.00 fee is charged for each of the 12 months.
Using federally-approved software that calculates APR (to comply with Regulation Z, Appendix J), the calculation returns the APR to be 21.488%.
The monthly payment is calculated as follows:
(Loan Amount + (10.00 x 12 months)) / 12 = 134.87.
According to the amortization schedule, none of the interest for any particular month exceeds 14%. How can the APR for the entire term be ~ 21% when none of the effective monthly interest rates even come close to 21%?
My intuition tells me that there is some averaging going on, but to achieve an average of 21%, some months would have to exceed 21% by quite a bit, while being offset by smaller percentages on the fringes of the curve.
If you are familiar with Reg Z, Appendix J, and the given example above, would you say that the formula being used is not appropriate? (There are a few others that the feds provide; maybe we/the software applied the wrong one)
Additionally, playing around with the software, keeping all numbers the same, but changing the term (in months), I find that the APR also changes. I find this confusing and counter-intuitive.
For example: 3 months, APR is 39.126% 6 months, APR is 27.393% 12 months, APR is 21.488%.
Can someone please explain this?
*All numbers above are the input and output values of approved calculation software.
Huge thanks in advance!
PS: Apologies for the seemingly uninformative tag(s). I couldn't find one that was more meaningful.