§1606 Determination of Annual Percentage Rate

Summary

Requires lenders to work out the annual percentage rate (APR) using set methods so the cost of credit is shown the same way. For most loans that are not "open-end" (like fixed loans), the APR is the yearly interest rate that, when applied to the unpaid balances and using the usual loan math where payments first cover interest and then principal, equals the total finance charge. The Bureau can allow a simpler math method if it gives nearly the same result. For open-end plans (like credit cards), the APR is the finance charge for a billing period divided by the amount the charge is based on, multiplied by how many such periods fit in a year. If the same finance charge applies to a range of balances, the APR uses the middle (median) balance unless the Bureau says another way is better. A disclosed APR is treated as correct if it is within one-eighth of 1 percent (0.125%) up or down, or if it is rounded to the nearest one-fourth of 1 percent (0.25%). The Bureau can allow larger tolerances for irregular payments, let lenders use rate tables or charts that vary by up to allowed tolerances (but not more than 8% of the rate except for irregular payments), and can approve other reasonable tolerances for different methods.