WEBVTT 00:00:00.000 --> 00:00:02.740 Welcome back to the Deep Dive. Today we are cracking 00:00:02.740 --> 00:00:05.960 open a metric that seems so simple on the surface, 00:00:06.160 --> 00:00:08.759 but it has all these hidden layers of complexity. 00:00:09.119 --> 00:00:11.000 I'm talking about the annual percentage rate 00:00:11.000 --> 00:00:14.439 or APR. You wanted us to unpack this one and 00:00:14.439 --> 00:00:17.000 for good reason. It's marketed as the great equalizer, 00:00:17.039 --> 00:00:19.640 right? The one number that lets you compare any 00:00:19.640 --> 00:00:22.940 loan, any mortgage, any credit card just instantly. 00:00:23.160 --> 00:00:26.079 And that's really the central unavoidable irony 00:00:26.079 --> 00:00:29.480 here. I mean, APR is legally mandated. It was 00:00:29.480 --> 00:00:31.739 designed specifically for consumer protection 00:00:31.739 --> 00:00:34.479 for easy comparison. But once you start to really 00:00:34.479 --> 00:00:36.200 dig into the source material, you find that the 00:00:36.200 --> 00:00:38.880 calculation is, well, it's highly discretionary. 00:00:38.880 --> 00:00:40.679 It varies wildly depending on whether you're 00:00:40.679 --> 00:00:43.039 in the U .S. or the EU. And in many cases, it 00:00:43.039 --> 00:00:45.119 fundamentally fails to represent the true total 00:00:45.119 --> 00:00:47.539 cost, especially for a savvy borrower who's really 00:00:47.539 --> 00:00:50.140 trying to optimize their debt. OK, so let's unpack 00:00:50.140 --> 00:00:53.259 this. Our mission today is to go way beyond the 00:00:53.259 --> 00:00:56.100 textbook definition. We need to understand not 00:00:56.100 --> 00:01:00.539 just what APR is, but the multiple, often conflicting 00:01:00.539 --> 00:01:03.780 ways it gets calculated. And why a legally compliant 00:01:03.780 --> 00:01:07.900 APR in, say, Texas is mathematically different 00:01:07.900 --> 00:01:10.659 from one in Portugal. And most critically, where 00:01:10.659 --> 00:01:12.900 this whole system of standardization just falls 00:01:12.900 --> 00:01:15.780 apart, leaving you, the consumer, to do the hard 00:01:15.780 --> 00:01:19.000 math yourself. Yeah, exactly. So to lay the groundwork, 00:01:19.079 --> 00:01:20.680 let's start with a core concept that everyone 00:01:20.680 --> 00:01:23.159 sort of agrees on. APR is the finance charge 00:01:23.159 --> 00:01:25.420 for a whole year, expresses an annualized rate. 00:01:25.599 --> 00:01:28.480 It applies to loans, mortgages, credit cards, 00:01:28.540 --> 00:01:30.680 and its original intent everywhere was to create 00:01:30.680 --> 00:01:32.659 a clear standard. But right out of the gate, 00:01:32.700 --> 00:01:34.780 we hit a major problem, especially in the United 00:01:34.780 --> 00:01:37.060 States. It's something that confuses just about 00:01:37.060 --> 00:01:39.739 every borrower. APR isn't just one thing. There 00:01:39.739 --> 00:01:41.719 are two main flavors, and understanding the difference 00:01:41.719 --> 00:01:44.680 is absolutely essential. Precisely. We have to 00:01:44.680 --> 00:01:46.299 distinguish between what's called the nominal 00:01:46.299 --> 00:01:50.079 APR and the effective APR, or eAPR. The nominal 00:01:50.079 --> 00:01:52.099 APR is the simple one. It's just the simple interest 00:01:52.099 --> 00:01:54.299 rate for a year. You take the periodic rate, 00:01:54.420 --> 00:01:56.659 so what you're charged each month or each week, 00:01:56.739 --> 00:01:58.760 and you just multiply it by the number of periods 00:01:58.760 --> 00:02:01.400 in a year. It completely ignores compounding. 00:02:01.500 --> 00:02:03.819 Okay, so if my credit code says it charges 1 00:02:03.819 --> 00:02:07.519 .5 % interest every month, the nominal APR is 00:02:07.519 --> 00:02:11.189 just 1 .5 times 12, so 18%. But that doesn't 00:02:11.189 --> 00:02:13.430 account for the fact that each month the interest 00:02:13.430 --> 00:02:16.750 is calculated on a new higher balance that includes 00:02:16.750 --> 00:02:19.430 last month's interest. Exactly. And that's where 00:02:19.430 --> 00:02:22.229 the effective APR, the EAPR, comes in. Some people 00:02:22.229 --> 00:02:24.949 call it the effective annual rate or EER. This 00:02:24.949 --> 00:02:27.289 is the true mathematically correct interest rate 00:02:27.289 --> 00:02:29.129 that actually accounts for that compounding effect. 00:02:29.449 --> 00:02:32.310 And in theory, it should also include any mandatory 00:02:32.310 --> 00:02:34.870 fees tied to the loan. It's the annual rate you're 00:02:34.870 --> 00:02:37.490 actually paying. And that distinction is so crucial 00:02:37.490 --> 00:02:40.500 because the U .S. system. for disclosure, mainly 00:02:40.500 --> 00:02:43.419 uses that nominal APR, which is then compounded 00:02:43.419 --> 00:02:46.159 monthly, but they just label it APR, which is 00:02:46.159 --> 00:02:49.360 misleading. And this right here sets the stage 00:02:49.360 --> 00:02:51.400 for everything else because even the definition 00:02:51.400 --> 00:02:55.009 of effective. the true cost, gets slippery depending 00:02:55.009 --> 00:02:57.189 on which fees a lender has to include. That's 00:02:57.189 --> 00:02:59.710 the multiplicity problem. We agree that the EAPR 00:02:59.710 --> 00:03:01.810 should reflect the compound interest plus the 00:03:01.810 --> 00:03:04.270 fees, but the calculation, it varies wildly. 00:03:04.469 --> 00:03:06.370 There's just no universal agreement on which 00:03:06.370 --> 00:03:09.930 fees are non -negotiable costs of borrowing versus 00:03:09.930 --> 00:03:12.889 just administrative charges. Things like participation 00:03:12.889 --> 00:03:15.729 fees, loan origination fees, service charges. 00:03:16.639 --> 00:03:19.039 Their inclusion is often discretionary or subject 00:03:19.039 --> 00:03:21.919 to very specific state laws. So a lender, or 00:03:21.919 --> 00:03:24.060 even the software they use, has to make an economic 00:03:24.060 --> 00:03:25.900 choice about what counts as the cost of borrowing. 00:03:26.159 --> 00:03:28.379 I mean, if a fee is mandatory to get the money, 00:03:28.479 --> 00:03:30.419 shouldn't that automatically be part of the APR? 00:03:30.879 --> 00:03:34.060 Logically, you'd think so. But legally, not always. 00:03:34.340 --> 00:03:36.680 We can see at least three different ways that 00:03:36.680 --> 00:03:39.060 effective APR gets computed, and they all give 00:03:39.060 --> 00:03:41.259 you different results precisely because of how 00:03:41.259 --> 00:03:44.050 they treat those fees. The simplest, and I'd 00:03:44.050 --> 00:03:46.770 argue the most misleading way, is method one. 00:03:47.240 --> 00:03:49.159 You just compound the interest rate for the year 00:03:49.159 --> 00:03:51.840 and completely ignore all the upfront fees. So 00:03:51.840 --> 00:03:53.919 it just pretends the fees don't exist. Right. 00:03:54.080 --> 00:03:56.539 It gives you a clean compounding rate, which 00:03:56.539 --> 00:03:58.639 is useful for comparing interest structures, 00:03:58.719 --> 00:04:00.879 I guess, but it fails the consumer protection 00:04:00.879 --> 00:04:03.180 test. It leaves out mandatory charges you have 00:04:03.180 --> 00:04:05.580 to pay to get the credit. That seems like a massive 00:04:05.580 --> 00:04:08.099 underestimation of the cost, especially if you 00:04:08.099 --> 00:04:11.060 have a big origination fee, like, say, 2 % on 00:04:11.060 --> 00:04:14.020 a mortgage. If it's so misleading, why is it 00:04:14.020 --> 00:04:16.079 even a permissible way to calculate it, even 00:04:16.079 --> 00:04:18.529 internally? Because it simplifies the underlying 00:04:18.529 --> 00:04:21.230 math. It separates the cost of the capital from 00:04:21.230 --> 00:04:24.189 the cost of administration. But, to be clear, 00:04:24.370 --> 00:04:26.589 it's not the standard method for disclosure under 00:04:26.589 --> 00:04:29.290 TILA, which does require including some fees. 00:04:29.550 --> 00:04:32.209 And that brings us to method two, which is a 00:04:32.209 --> 00:04:35.649 bit better. Okay, method two. Method two tries 00:04:35.649 --> 00:04:38.230 to fix that gap. It takes the origination fees 00:04:38.230 --> 00:04:41.300 and adds them directly to the balance due. So 00:04:41.300 --> 00:04:43.560 the whole amount principal plus fees is treated 00:04:43.560 --> 00:04:46.160 as the new effective principal. And that's what 00:04:46.160 --> 00:04:48.620 the compound interest is based on. The assumption 00:04:48.620 --> 00:04:52.019 is the lender financed those fees for you. So 00:04:52.019 --> 00:04:55.000 if I borrow $100 ,000, but there's a $2 ,000 00:04:55.000 --> 00:04:58.110 origination fee. They calculate my interest as 00:04:58.110 --> 00:05:01.430 if I borrowed $102 ,000 from day one. That feels 00:05:01.430 --> 00:05:03.730 like a much more accurate reflection of my actual 00:05:03.730 --> 00:05:06.370 financial exposure. It is, and it tends to inflate 00:05:06.370 --> 00:05:08.930 the APR a bit compared to method one. But then 00:05:08.930 --> 00:05:10.930 there's a third, even more complex approach, 00:05:11.129 --> 00:05:13.730 method three. Some lenders use this one, especially 00:05:13.730 --> 00:05:16.790 in non -standard financing agreements. What's 00:05:16.790 --> 00:05:18.970 method three? Method three treats those origination 00:05:18.970 --> 00:05:21.230 fees as if they're a separate short -term loan 00:05:21.230 --> 00:05:23.470 that's amortized almost immediately, due in the 00:05:23.470 --> 00:05:25.589 first payment or two. And then the rest of the 00:05:25.589 --> 00:05:28.310 unpaid balance is treated as the separate long 00:05:28.310 --> 00:05:30.350 -term loan. Wait, so it's like splitting the 00:05:30.350 --> 00:05:32.730 loan in two, one part to pay the fees right away 00:05:32.730 --> 00:05:34.750 and the other for the actual money I borrowed, 00:05:34.930 --> 00:05:37.550 all hidden in one payment schedule. Why would 00:05:37.550 --> 00:05:39.910 a lender want to do that? The incentive is subtle, 00:05:39.990 --> 00:05:42.889 but it's powerful. If you pay down those big 00:05:42.889 --> 00:05:45.730 upfront fees almost immediately, the principal 00:05:45.730 --> 00:05:48.670 balance of the main long -term loan shrinks faster 00:05:48.670 --> 00:05:52.490 than in method two. And this structure can, in 00:05:52.490 --> 00:05:55.329 some cases, slightly lower the final long -term 00:05:55.329 --> 00:05:57.569 APR that the lender has to disclose, even though 00:05:57.569 --> 00:05:59.670 you paid the fees right up front. So you make 00:05:59.670 --> 00:06:01.610 a couple of extra large payments at the start 00:06:01.610 --> 00:06:04.110 to clear out the fees. Right. And by getting 00:06:04.110 --> 00:06:06.089 those fees out of the long -term interest calculation 00:06:06.089 --> 00:06:09.750 basis quickly, the lender can technically quote 00:06:09.750 --> 00:06:12.269 you a slightly better APR on the long -term note. 00:06:12.610 --> 00:06:14.649 It's an accounting maneuver, really, designed 00:06:14.649 --> 00:06:17.290 to optimize the quoted rate. This just shows 00:06:17.290 --> 00:06:19.829 how arbitrary the whole process is. Okay, let's 00:06:19.829 --> 00:06:21.689 get to that shocking example, because this is 00:06:21.689 --> 00:06:24.290 what really drives home why just including or 00:06:24.290 --> 00:06:27.129 excluding one single fee can completely break 00:06:27.129 --> 00:06:29.490 the whole idea of comparing APRs. This is the 00:06:29.490 --> 00:06:31.970 aha moment. It's the proof that you can't just 00:06:31.970 --> 00:06:33.810 look at the APR number. You have to read the 00:06:33.810 --> 00:06:36.569 fine print on fees. So imagine a really simple 00:06:36.569 --> 00:06:39.170 short -term loan, $100, you have to pay it back 00:06:39.170 --> 00:06:42.370 after one month, plus 5 % interest, and there's 00:06:42.370 --> 00:06:45.009 a flat $10 administrative fee. Okay, so after 00:06:45.009 --> 00:06:48.230 30 days, I owe them the $100 principal. $5 in 00:06:48.230 --> 00:06:51.110 interest, and that $10 fee. My total repayment 00:06:51.110 --> 00:06:54.009 is $115. Right. Now, let's calculate the effective 00:06:54.009 --> 00:06:56.410 APR based on two different legal interpretations. 00:06:57.089 --> 00:07:00.110 Interpretation A, we ignore the $10 fee. We treat 00:07:00.110 --> 00:07:02.329 it as an excluded administrative cost, so the 00:07:02.329 --> 00:07:05.430 monthly rate is just 5%. If we compound that 00:07:05.430 --> 00:07:08.850 monthly rate over 12 periods, so 1 .05 to the 00:07:08.850 --> 00:07:11.490 power of 12, the effective APR comes out to about 00:07:11.490 --> 00:07:15.279 79 .59%. Let's just call it... 80%. That's already 00:07:15.279 --> 00:07:17.060 high, but it's just the interest compounding. 00:07:17.060 --> 00:07:19.959 Okay. 80%. That's the baseline. Now let's factor 00:07:19.959 --> 00:07:22.680 in that mandatory $10 fee. Okay. Interpretation 00:07:22.680 --> 00:07:26.079 B. We recognize that a $10 fee on a $100 loan 00:07:26.079 --> 00:07:28.779 is basically an extra 10 % charge for the month. 00:07:28.860 --> 00:07:30.600 So your total effective monthly charge is now 00:07:30.600 --> 00:07:33.620 15%. That's the 5 % interest plus the 10 % from 00:07:33.620 --> 00:07:35.920 the fee. Now compound that higher rate for a 00:07:35.920 --> 00:07:38.420 year. So 1 .15 to the power of 12. That small 00:07:38.420 --> 00:07:40.500 bump in the monthly rate is going to be catastrophic 00:07:40.500 --> 00:07:44.220 when you compound it annually. It is truly staggering. 00:07:44.600 --> 00:07:47.720 Compounding 15 % monthly gives you a factor of 00:07:47.720 --> 00:07:51.600 5 .35. So the total annual increase is 435%. 00:07:51.600 --> 00:07:54.779 So for the exact same loan paid back the exact 00:07:54.779 --> 00:07:57.759 same way, the calculated effective APR could 00:07:57.759 --> 00:08:02.519 be quoted as 80 % or 435%. Wow. And your ability 00:08:02.519 --> 00:08:05.019 as a consumer to compare loans just disappears. 00:08:05.199 --> 00:08:08.000 All because the laws vary on whether that mandatory 00:08:08.000 --> 00:08:10.019 fee has to be included in the calculation. So 00:08:10.019 --> 00:08:12.149 you wanted a great equalizer. Instead, you get 00:08:12.149 --> 00:08:14.410 calculation anarchy based on legal loopholes. 00:08:14.470 --> 00:08:16.529 Right. The lesson here for you is to always ask 00:08:16.529 --> 00:08:18.810 for the total cost in dollars, not just the rate. 00:08:19.110 --> 00:08:21.910 Exactly. This complexity forces governments to 00:08:21.910 --> 00:08:24.110 step in and try to mandate standardization. But 00:08:24.110 --> 00:08:26.129 even that standardization is wildly different 00:08:26.129 --> 00:08:27.730 depending on where you are. Let's start with 00:08:27.730 --> 00:08:29.449 the U .S. regulatory environment. It tries to 00:08:29.449 --> 00:08:31.370 sort of bridge the gap between that misleading 00:08:31.370 --> 00:08:33.629 nominal rate and the true cost. The framework 00:08:33.629 --> 00:08:37.059 here is the Truth in Lending Act. Or TILA. It's 00:08:37.059 --> 00:08:39.240 implemented by the Consumer Financial Protection 00:08:39.240 --> 00:08:42.500 Bureau, the CFPB, through something called Regulation 00:08:42.500 --> 00:08:46.360 Z. In the U .S., the APR figure you have to disclose 00:08:46.360 --> 00:08:50.379 is this. This artificially inflated nominal rate. 00:08:50.480 --> 00:08:52.840 It takes the periodic rate times the number of 00:08:52.840 --> 00:08:55.700 periods, but TILA requires you to include certain 00:08:55.700 --> 00:08:58.340 non -interest charges and fees in that calculation. 00:08:58.700 --> 00:09:00.860 So it's a regulatory Frankenstein's monster. 00:09:01.159 --> 00:09:04.059 It's a nominal rate, but it's... inflated to 00:09:04.059 --> 00:09:06.500 account for some fees, making it this hybrid 00:09:06.500 --> 00:09:08.519 number that's neither the true compound cost 00:09:08.519 --> 00:09:10.620 nor the simple interest rate. That's a perfect 00:09:10.620 --> 00:09:12.779 way to put it. Yeah. It requires this detailed, 00:09:12.980 --> 00:09:15.700 almost arbitrary calculation to figure out exactly 00:09:15.700 --> 00:09:18.519 which fees have to be covered. And this APR has 00:09:18.519 --> 00:09:20.559 to be disclosed to you within three days of applying 00:09:20.559 --> 00:09:22.500 for a mortgage. You'll find it on that initial 00:09:22.500 --> 00:09:24.759 truth and lending disclosure. And if we look 00:09:24.759 --> 00:09:27.879 at mortgages specifically. The rules get incredibly 00:09:27.879 --> 00:09:30.519 strict about the accuracy of that hybrid figure. 00:09:30.659 --> 00:09:32.840 I'm thinking about the Mortgage Disclosure Improvement 00:09:32.840 --> 00:09:36.399 Act, the MDIA. Right, the MDIA. It came into 00:09:36.399 --> 00:09:38.840 effect in 2009, and it introduced a critical 00:09:38.840 --> 00:09:41.240 rule about the tolerance level for APR disclosure. 00:09:41.980 --> 00:09:44.379 Regulators realized people were getting surprised 00:09:44.379 --> 00:09:46.120 at the closing table with slightly different 00:09:46.120 --> 00:09:49.539 rates. So the rule says if the final APR on your 00:09:49.539 --> 00:09:52.879 mortgage is off by more than 0 .125 percent. 00:09:53.139 --> 00:09:56.399 One -eighth of one percent. Exactly. Just one 00:09:56.399 --> 00:09:58.259 -eighth of one percent different from the initial 00:09:58.259 --> 00:10:00.960 disclosure, the lender is required to redisclose. 00:10:01.159 --> 00:10:03.220 Why should a borrower care about a number that 00:10:03.220 --> 00:10:07.460 small? 0 .125%. Because that tiny variance triggers 00:10:07.460 --> 00:10:09.840 a mandatory three business day waiting period 00:10:09.840 --> 00:10:12.179 before you can close on the loan. It's government 00:10:12.179 --> 00:10:15.019 saying you almost misled this consumer. Now they 00:10:15.019 --> 00:10:18.000 get a cooling off period. For you, that 0 .125 00:10:18.000 --> 00:10:21.419 % is a threshold of significant financial inaccuracy. 00:10:21.539 --> 00:10:24.240 If the actual rate is higher by that tiny margin, 00:10:24.419 --> 00:10:26.620 the lender has to hit pause and that could delay 00:10:26.620 --> 00:10:28.860 your closing by days or even weeks. And Tila 00:10:28.860 --> 00:10:30.639 has different rules for different kinds of credit, 00:10:30.759 --> 00:10:33.720 right? It does. Yes, it splits them into close 00:10:33.720 --> 00:10:36.220 ended credit. That's your fixed term mortgages 00:10:36.220 --> 00:10:39.480 and auto loans and open ended credit, which is 00:10:39.480 --> 00:10:42.399 your credit cards and lines of credit. The calculations 00:10:42.399 --> 00:10:45.399 are different for each. OK, now let's give it 00:10:45.399 --> 00:10:48.100 across the pond because the EU's goal was radically 00:10:48.100 --> 00:10:50.559 different. They wanted singular transparency. 00:10:51.470 --> 00:10:54.169 based on mathematical purity. Yeah, the EU approach 00:10:54.169 --> 00:10:56.769 is fundamentally philosophical. They wanted to 00:10:56.769 --> 00:10:59.509 eliminate all the confusion. Their directives 00:10:59.509 --> 00:11:01.889 basically demanded a unified approach. The goal 00:11:01.889 --> 00:11:04.169 was to make sure a consumer gets a comprehensible 00:11:04.169 --> 00:11:06.750 set of information and that every creditor must 00:11:06.750 --> 00:11:09.590 use the exact same form and formula. So the idea 00:11:09.590 --> 00:11:12.730 was forget nominal rates and confusing hybrids. 00:11:12.769 --> 00:11:14.710 We're going to force everyone to use the true 00:11:14.710 --> 00:11:17.710 single economic cost calculation, no matter how 00:11:17.710 --> 00:11:20.250 complex it is. That is precisely the objective. 00:11:20.750 --> 00:11:23.169 The EU mandated a single method based on the 00:11:23.169 --> 00:11:25.610 Internal Rate of Return, or IRR, methodology. 00:11:25.970 --> 00:11:28.129 The math is designed to equate the present value 00:11:28.129 --> 00:11:30.049 of the money the lender gives you with the present 00:11:30.049 --> 00:11:32.950 value of the money you pay back. The APR is the 00:11:32.950 --> 00:11:35.070 interest rate that makes those two values exactly 00:11:35.070 --> 00:11:37.909 equal. That sounds pretty dense for a consumer 00:11:37.909 --> 00:11:40.429 disclosure. Can you simplify the principle for 00:11:40.429 --> 00:11:44.110 us? Think of it like this. Money today is worth 00:11:44.110 --> 00:11:47.649 more than money tomorrow. The EU formula is trying 00:11:47.649 --> 00:11:50.610 to find the single discount rate that perfectly 00:11:50.610 --> 00:11:53.110 balances the cash flow from the lender to you 00:11:53.110 --> 00:11:55.830 against the cash flow from you back to the lender. 00:11:56.090 --> 00:11:58.870 The formula finds that one annual interest rate 00:11:58.870 --> 00:12:01.129 that makes those two streams of money have the 00:12:01.129 --> 00:12:03.570 identical value today at the moment you sign 00:12:03.570 --> 00:12:05.590 the contract. So it's a true yield calculation. 00:12:05.750 --> 00:12:07.889 It's like finding the internal rate of return 00:12:07.889 --> 00:12:10.090 for the entire life of the debt and the precision 00:12:10.090 --> 00:12:14.419 they demand is. Almost absurd. It really is standardization 00:12:14.419 --> 00:12:17.000 taken to the nth degree. The EU standard says 00:12:17.000 --> 00:12:21.019 a year has 365 days, or 366 for a leap year, 00:12:21.159 --> 00:12:23.620 and an equal month is defined with incredible 00:12:23.620 --> 00:12:28.080 specificity, exactly 30 .41666 days. This makes 00:12:28.080 --> 00:12:30.080 sure every bank across the continent is using 00:12:30.080 --> 00:12:32.320 the exact same time assumption for every calculation. 00:12:32.559 --> 00:12:35.120 It eliminates one source of variability. And 00:12:35.120 --> 00:12:36.919 the final APR has to be expressed to at least 00:12:36.919 --> 00:12:39.639 one decimal place. Yeah, true. Uniform standardization. 00:12:40.000 --> 00:12:42.509 But... This rigor comes with major limitations. 00:12:42.870 --> 00:12:45.450 The directive only applies to consumer credit 00:12:45.450 --> 00:12:48.570 agreements of 50 ,000 and below. And critically, 00:12:48.830 --> 00:12:52.070 it excludes all mortgages. The complexity of 00:12:52.070 --> 00:12:54.509 modeling a 30 year cash flow with variable rates 00:12:54.509 --> 00:12:56.970 and refinancing was just too much to force into 00:12:56.970 --> 00:12:59.429 one formula across all member states at first. 00:12:59.610 --> 00:13:01.870 But some countries did adopt a similar formula 00:13:01.870 --> 00:13:04.200 for their mortgages anyway, right? They did. 00:13:04.519 --> 00:13:07.080 Places like the Netherlands use a similar cash 00:13:07.080 --> 00:13:08.940 flow based formula. And when they do that, it 00:13:08.940 --> 00:13:11.320 has to account for all the moving parts, the 00:13:11.320 --> 00:13:14.799 principal, any prepaid fees and maybe even a 00:13:14.799 --> 00:13:16.870 residual rest debt. if it's an interest -only 00:13:16.870 --> 00:13:19.509 loan. And you can't just solve for that APR directly, 00:13:19.710 --> 00:13:21.330 can you? No, it's mathematically impossible. 00:13:21.690 --> 00:13:24.590 Because the APR is embedded in the exponents 00:13:24.590 --> 00:13:26.730 in the amortization formulas, you have to solve 00:13:26.730 --> 00:13:28.850 for it iteratively. You basically have to make 00:13:28.850 --> 00:13:31.330 a guess, see if it balances, and then refine 00:13:31.330 --> 00:13:33.169 your guess until you get the required precision. 00:13:33.409 --> 00:13:35.610 It requires sophisticated financial software. 00:13:35.950 --> 00:13:37.769 So on one side, you've got the U .S. system, 00:13:37.909 --> 00:13:40.330 which is standardized but uses a kind of misleading 00:13:40.330 --> 00:13:43.620 hybrid rate. On the other, the EU system, which 00:13:43.620 --> 00:13:46.480 uses the mathematically pure rate, but only for 00:13:46.480 --> 00:13:49.240 small consumer loans. Neither system is perfect. 00:13:49.399 --> 00:13:51.679 Not at all. And this all connects to the bigger 00:13:51.679 --> 00:13:53.779 picture. The whole point of these regulations, 00:13:54.039 --> 00:13:56.679 whether it's TILA or the EU directives, is to 00:13:56.679 --> 00:13:59.259 combat one primary tactic lenders have used for 00:13:59.259 --> 00:14:02.019 centuries. And that's using confusing language 00:14:02.019 --> 00:14:04.519 to make a loan seem cheaper than it is. That's 00:14:04.519 --> 00:14:06.919 why APR was invented, to standardize it so you 00:14:06.919 --> 00:14:08.840 don't get tricked by terms like rate in advance 00:14:08.840 --> 00:14:12.700 or monthly periodic rate. So let's take a simple, 00:14:12.799 --> 00:14:16.019 true, cost -effective annual rate of 10%. What 00:14:16.019 --> 00:14:17.779 are some confusing ways a lender could quote 00:14:17.779 --> 00:14:20.529 that same rate? Oh, there are several. If a loan's 00:14:20.529 --> 00:14:23.870 true ER is 10%, a lender could confuse you by 00:14:23.870 --> 00:14:27.789 quoting it as a 0 .7974 % effective monthly interest 00:14:27.789 --> 00:14:30.509 rate. That number looks tiny, right? Almost nothing. 00:14:30.690 --> 00:14:33.549 But compound it for 12 months and you're at 10%. 00:14:33.549 --> 00:14:37.610 Or they could quote it as 9 .569 % annual interest 00:14:37.610 --> 00:14:40.409 rate compounded monthly. That's just the tiny 00:14:40.409 --> 00:14:43.250 monthly rate multiplied by 12, ignoring the compounding, 00:14:43.250 --> 00:14:47.750 or even more obscurely as 9 .091 % annual rate. 00:14:48.009 --> 00:14:50.090 advance. This one always sounds the cheapest, 00:14:50.129 --> 00:14:52.250 but it's just another mathematical trick to get 00:14:52.250 --> 00:14:54.850 to the same 10 % effective cost. So the whole 00:14:54.850 --> 00:14:57.570 job of APR is to cut through that jargon so you're 00:14:57.570 --> 00:14:59.789 comparing apples to apples. But there's a problem 00:14:59.789 --> 00:15:02.669 here that even standardized APR can't fix. The 00:15:02.669 --> 00:15:04.649 APR is heavily dependent on the duration of the 00:15:04.649 --> 00:15:06.690 loan. This is a critical failing. You simply 00:15:06.690 --> 00:15:09.529 cannot compare the APR for a 30 -year loan directly 00:15:09.529 --> 00:15:14.509 to the APR for a 20 -year loan. It is a factor 00:15:14.509 --> 00:15:16.450 that matters most. And that time dependence is 00:15:16.450 --> 00:15:18.450 all governed by the amortization schedule. The 00:15:18.450 --> 00:15:20.429 longer the loan, the lower the payment seems. 00:15:20.710 --> 00:15:23.059 Right. But the more often that interest has time 00:15:23.059 --> 00:15:25.179 to accrue and compound before you paid on the 00:15:25.179 --> 00:15:27.840 principal. As the number of payments, N, gets 00:15:27.840 --> 00:15:30.039 bigger, the payment size, P, gets smaller, which 00:15:30.039 --> 00:15:32.759 feels good. But the total interest you pay just 00:15:32.759 --> 00:15:34.980 skyrockets. Let's use that classic mortgage example 00:15:34.980 --> 00:15:37.419 to show the brutal financial gravity here. Say 00:15:37.419 --> 00:15:41.299 a simple $100 ,000 principal loan, no fees, stable 00:15:41.299 --> 00:15:44.519 interest rate. Okay. If that $100 ,000 is mortgaged 00:15:44.519 --> 00:15:47.659 over 15 years, the total cost you pay, principal 00:15:47.659 --> 00:15:52.149 and interest, is $193 ,429. The interest you 00:15:52.149 --> 00:15:57.029 paid is $93 ,429 .80. So 93 .4 % of the original 00:15:57.029 --> 00:15:58.990 principal. You nearly double your money. Now 00:15:58.990 --> 00:16:01.250 hold the APR constant. Same rate, same lender, 00:16:01.330 --> 00:16:03.750 but spread it out over 30 years. Over 30 years. 00:16:03.850 --> 00:16:08.710 The total cost jumps to $315 ,925 .20. The total 00:16:08.710 --> 00:16:13.750 interest is now $215 ,925 .20. That's 215 .9 00:16:13.750 --> 00:16:15.750 % of the original principal. Wait, so the same 00:16:15.750 --> 00:16:17.909 borrower, same rate? Just by picking a longer 00:16:17.909 --> 00:16:19.669 term pays more than double the original loan 00:16:19.669 --> 00:16:23.090 amount in interest alone. Correct. The APR only 00:16:23.090 --> 00:16:25.590 tells you the rate of the charge, not the magnitude 00:16:25.590 --> 00:16:28.429 of the total financial commitment. For a savvy 00:16:28.429 --> 00:16:30.669 borrower, the calendar is often a much greater 00:16:30.669 --> 00:16:33.370 danger than a small difference in the rate. APR 00:16:33.370 --> 00:16:35.309 is meaningless if you aren't comparing loans 00:16:35.309 --> 00:16:37.669 with identical terms. This brings up another 00:16:37.669 --> 00:16:41.429 point, especially for mortgages. The APR calculation 00:16:41.429 --> 00:16:43.850 assumes you'll keep the loan for the entire term. 00:16:44.230 --> 00:16:46.110 What happens when that assumption is broken? 00:16:46.590 --> 00:16:49.370 This is a major structural failing. Most U .S. 00:16:49.389 --> 00:16:51.769 mortgages are paid off or refinanced within, 00:16:51.809 --> 00:16:55.409 say, seven to 10 years. If you pay off a 30 year 00:16:55.409 --> 00:16:58.090 mortgage after only seven years, all those big 00:16:58.090 --> 00:17:00.210 upfront fees and points that were spread out 00:17:00.210 --> 00:17:03.029 over 30 years in the APR calculation, they get 00:17:03.029 --> 00:17:05.450 compressed into a seven year period. Which drastically 00:17:05.450 --> 00:17:07.670 increases the actual effective rate you paid 00:17:07.670 --> 00:17:09.819 during the time you have a loan. Absolutely. 00:17:09.980 --> 00:17:12.900 The 30 -year APR significantly understates the 00:17:12.900 --> 00:17:15.359 effective cost for anyone who moves or refinances. 00:17:15.720 --> 00:17:18.380 If you move often, a slightly lower interest 00:17:18.380 --> 00:17:20.660 rate loan with high origination fees will often 00:17:20.660 --> 00:17:22.799 be way more expensive than a slightly higher 00:17:22.799 --> 00:17:25.480 rate loan with zero fees, even if the APR is 00:17:25.480 --> 00:17:27.680 identical on paper. And before we move on, we 00:17:27.680 --> 00:17:29.660 have to touch on the money factor because this 00:17:29.660 --> 00:17:31.859 is a standard measurement used to intentionally 00:17:31.859 --> 00:17:35.730 hide the APR in car leasing. Right. When you 00:17:35.730 --> 00:17:38.230 lease a car, instead of quoting an APR, they 00:17:38.230 --> 00:17:41.710 quote a money factor. It's often this deceptively 00:17:41.710 --> 00:17:46.369 small decimal, like .0030. Seems tiny. How do 00:17:46.369 --> 00:17:48.289 you translate that to the rate I'm actually paying? 00:17:48.490 --> 00:17:50.829 You have to multiply the money factor by 2 ,400. 00:17:50.990 --> 00:17:53.289 That's the industry standard. So a money factor 00:17:53.289 --> 00:17:56.849 of .0033, you multiply it by 2 ,400, and you 00:17:56.849 --> 00:18:00.190 get 7 .2%. That's your actual equivalent APR. 00:18:00.230 --> 00:18:03.680 Why 2 ,400? The math is a bit complex, but the 00:18:03.680 --> 00:18:05.900 money factor is basically the average monthly 00:18:05.900 --> 00:18:08.079 interest divided by the average value of the 00:18:08.079 --> 00:18:10.319 car. To get it back to an annualized percentage, 00:18:10.500 --> 00:18:12.180 you have to multiply by 12 for the months and 00:18:12.180 --> 00:18:14.640 100 to make it a percent. And it all works out 00:18:14.640 --> 00:18:17.660 to that 2400 factor. It's designed to be opaque. 00:18:17.960 --> 00:18:19.940 It's a way to present the interest so it seems 00:18:19.940 --> 00:18:23.220 small, forcing you to do unfamiliar math to discover 00:18:23.220 --> 00:18:25.500 the true rate. It's a perfect example of the 00:18:25.500 --> 00:18:28.059 financial jargon trap. OK, so despite all these 00:18:28.059 --> 00:18:31.269 regulations. The U .S. APR system still fails 00:18:31.269 --> 00:18:34.470 in several key areas. Let's start with the most 00:18:34.470 --> 00:18:37.670 insidious one. The confusion between the nominal 00:18:37.670 --> 00:18:39.930 rate and the effective rate. Right. For credit 00:18:39.930 --> 00:18:42.430 cards, nearly all U .S. products are quoted in 00:18:42.430 --> 00:18:45.670 nominal APR compounded monthly. The failure is 00:18:45.670 --> 00:18:47.990 that they use the word annual in APR, but they 00:18:47.990 --> 00:18:50.369 are not disclosing the true effective annual 00:18:50.369 --> 00:18:54.079 rate, the ER. The effect of that monthly compounding 00:18:54.079 --> 00:18:56.339 is hidden, so the bank gets to quote a lower 00:18:56.339 --> 00:18:58.839 rate than what you actually pay. So the quoted 00:18:58.839 --> 00:19:01.759 rate is lying by omission. It's not including 00:19:01.759 --> 00:19:04.720 the powerful exponential effect of monthly compounding. 00:19:04.940 --> 00:19:06.920 Let's talk about the financial gravity of this. 00:19:07.079 --> 00:19:08.680 We can use the formula to show it. Let's take 00:19:08.680 --> 00:19:11.000 a common credit card rate, courted at 12 .99 00:19:11.000 --> 00:19:14.279 % nominal APR. The actual one -year EER is not 00:19:14.279 --> 00:19:19.160 12 .99%. It's 13 .7975%. That's almost a full 00:19:19.160 --> 00:19:21.119 percentage point difference. That's not a rounding 00:19:21.119 --> 00:19:22.920 error. That's like a whole other tier of interest 00:19:22.920 --> 00:19:24.680 hidden in the math. What about high -interest 00:19:24.680 --> 00:19:27.759 cards? If a card have a high nominal APR of 29 00:19:27.759 --> 00:19:31.599 .99 % compounded monthly, it's actual effective 00:19:31.599 --> 00:19:34.339 annual rate. The rate you really pay over a year 00:19:34.339 --> 00:19:38.119 is 34 .48%. That's nearly five full percentage 00:19:38.119 --> 00:19:40.140 points of difference hidden just by using the 00:19:40.140 --> 00:19:42.359 nominal quote instead of the ER. So the rate 00:19:42.359 --> 00:19:46.539 is quoted at 29 .99%, but the true rate is 34 00:19:46.539 --> 00:19:50.880 .48%. That is catastrophic hidden cost. Why does 00:19:50.880 --> 00:19:52.900 the U .S. system stick with disclosing the nominal 00:19:52.900 --> 00:19:55.880 rate knowing the ear is the truth? It's largely 00:19:55.880 --> 00:19:58.279 historical. It's linked to how TILA was first 00:19:58.279 --> 00:20:01.000 written. Simple annual interest was easier to 00:20:01.000 --> 00:20:02.920 calculate and it was accepted as the standard. 00:20:03.059 --> 00:20:05.220 Changing it now across the entire industry would 00:20:05.220 --> 00:20:08.240 require a massive legislative overhaul. And there's 00:20:08.240 --> 00:20:10.720 a significant lobbying against requiring the 00:20:10.720 --> 00:20:12.500 disclosure of the higher ear figure. And the 00:20:12.500 --> 00:20:14.259 long term impact is just devastating. Let's look 00:20:14.259 --> 00:20:16.539 at that $200 ,000 loan example. OK, a 30 year 00:20:16.539 --> 00:20:19.039 loan of $200 ,000. If the lender says the APR 00:20:19.039 --> 00:20:30.910 is 10%. Now, if that loan had a true flat 10 00:20:30.910 --> 00:20:33.630 .00 % ER, the mathematically true annual cost, 00:20:33.789 --> 00:20:36.289 what's the payment? The payment for a true 10 00:20:36.289 --> 00:20:42.150 .00 % ER loan would be $1 ,691 .78. The difference 00:20:42.150 --> 00:20:45.170 is $64 .09 a month. It doesn't sound like much, 00:20:45.289 --> 00:20:48.069 but you pay that every month for 30 years. Over 00:20:48.069 --> 00:20:50.250 the life of the loan, that small difference amounts 00:20:50.250 --> 00:20:55.230 to $23 ,070 .86 in extra interest. $23 ,000 extra. 00:20:55.430 --> 00:20:57.690 Just because of the subtle difference in how 00:20:57.690 --> 00:21:00.289 the rate is quoted and calculated, that's a hidden 00:21:00.289 --> 00:21:02.670 cost you are absolutely not equipped to calculate 00:21:02.670 --> 00:21:05.410 on the fly. This brings us to failing number 00:21:05.410 --> 00:21:09.460 two. The intentional exclusion of key fees, or 00:21:09.460 --> 00:21:12.099 what a lot of people call junk fees. Right. Because 00:21:12.099 --> 00:21:14.660 APR is a regulatory construct, some fees are 00:21:14.660 --> 00:21:16.500 deliberately not included in the calculation 00:21:16.500 --> 00:21:19.319 under TILA. So the APR always understates the 00:21:19.319 --> 00:21:21.680 total cost of borrowing. These usually fall into 00:21:21.680 --> 00:21:24.079 two categories. First, routine one -time fees 00:21:24.079 --> 00:21:26.039 paid to third parties, like a real estate attorney. 00:21:26.519 --> 00:21:28.940 Second, conditional charges, like penalties for 00:21:28.940 --> 00:21:31.279 late fees or over -limit fees. These are excluded 00:21:31.279 --> 00:21:33.059 no matter how big they are or how likely you 00:21:33.059 --> 00:21:35.000 are to be charged. Lenders say these are just 00:21:35.000 --> 00:21:37.230 pass -through. costs, right? Unrelated to the 00:21:37.230 --> 00:21:39.490 cost of the capital itself. That's their argument. 00:21:39.750 --> 00:21:42.029 They say they're separate transactions, not a 00:21:42.029 --> 00:21:44.829 cost of the lending itself. They also argue that 00:21:44.829 --> 00:21:46.809 including things like late fees would require 00:21:46.809 --> 00:21:48.970 making assumptions about your future behavior, 00:21:49.250 --> 00:21:51.549 which they say would just create more confusion. 00:21:51.970 --> 00:21:54.809 But consumer advocates push back hard on that, 00:21:54.890 --> 00:21:58.329 pointing out that in many cases, the lender insists 00:21:58.329 --> 00:22:02.089 you use their specific attorney or vendor. That 00:22:02.089 --> 00:22:04.410 makes the fee a mandatory cost of doing business. 00:22:05.019 --> 00:22:07.440 That is the core of the debate. If the lender 00:22:07.440 --> 00:22:10.299 controls the vendor, advocates say the fee is 00:22:10.299 --> 00:22:12.559 part of the total cost and should be included. 00:22:12.819 --> 00:22:15.099 And this gets even more complicated when you 00:22:15.099 --> 00:22:17.440 have contingency fees, where the lender gets 00:22:17.440 --> 00:22:19.579 a hidden kickback from the attorney or appraisal 00:22:19.579 --> 00:22:22.279 firm for sending business their way. Which explains 00:22:22.279 --> 00:22:24.759 why U .S. regulators require lenders to give 00:22:24.759 --> 00:22:27.339 you an affiliated business disclosure form showing 00:22:27.339 --> 00:22:29.839 any kickbacks between the lender and these third 00:22:29.839 --> 00:22:32.529 parties. Exactly. But even with those forms, 00:22:32.670 --> 00:22:35.049 the fees themselves are often still excluded 00:22:35.049 --> 00:22:38.490 from the APR. It means you, the borrower, have 00:22:38.490 --> 00:22:41.289 to compare the quoted APR plus the affiliated 00:22:41.289 --> 00:22:44.150 business disclosure form plus the closing cost 00:22:44.150 --> 00:22:46.750 sheet to understand the real price. It's a three 00:22:46.750 --> 00:22:49.549 -step process, not one. Which brings us to failing 00:22:49.549 --> 00:22:53.309 number three. APR isn't a truly comparable standard, 00:22:53.410 --> 00:22:56.440 even in a highly regulated environment. because 00:22:56.440 --> 00:22:58.660 of how discretionary the fee inclusion is. Correct. 00:22:58.980 --> 00:23:01.079 Regulators just couldn't mandate every single 00:23:01.079 --> 00:23:03.960 fee be included. So as a consumer, you can calculate 00:23:03.960 --> 00:23:06.519 the APR yourself, but you still need access to 00:23:06.519 --> 00:23:08.420 all the costs and assumptions which the lender 00:23:08.420 --> 00:23:10.420 might withhold. Let's run through the list of 00:23:10.420 --> 00:23:12.859 fees and their status in a U .S. mortgage, because 00:23:12.859 --> 00:23:15.599 this really highlights the confusion. Okay. There 00:23:15.599 --> 00:23:17.720 are fees that are generally included. Regulators 00:23:17.720 --> 00:23:19.859 decided these definitely impact the cost of capital. 00:23:20.019 --> 00:23:22.380 That's your points, prepaid interest, and origination 00:23:22.380 --> 00:23:24.779 fees. Then you have the routine costs that are 00:23:24.779 --> 00:23:27.309 generally not. included in the APR. This list 00:23:27.309 --> 00:23:30.470 is long. Application fees, appraisal costs, credit 00:23:30.470 --> 00:23:32.869 report costs, the title fee. You have to pay 00:23:32.869 --> 00:23:35.150 all of them to get the loan, but they don't inflate 00:23:35.150 --> 00:23:37.450 the disclosed APR. And then the most problematic 00:23:37.450 --> 00:23:40.690 category, fees that are only sometimes included. 00:23:40.990 --> 00:23:44.349 This is where comparability dies. This list includes 00:23:44.349 --> 00:23:47.769 attorney fees. document prep fees, and critically, 00:23:48.029 --> 00:23:51.089 private mortgage insurance, or PMI. PMI is a 00:23:51.089 --> 00:23:53.509 huge ongoing cost, and whether it's included 00:23:53.509 --> 00:23:56.289 or not can drastically alter the APR. It's almost 00:23:56.289 --> 00:23:59.410 impossible to compare lender A to lender B without 00:23:59.410 --> 00:24:02.089 their itemized fee sheets and a calculator. And 00:24:02.089 --> 00:24:04.190 this breakdown is exposed completely in cases 00:24:04.190 --> 00:24:07.369 of vendor financing, like car sales. The vendor 00:24:07.369 --> 00:24:10.450 financing problem. Right. If a car dealer offers 00:24:10.450 --> 00:24:13.990 you, say, 0 % financing, but only if you accept 00:24:13.990 --> 00:24:16.950 the full MSRP for the car, the true cost of the 00:24:16.950 --> 00:24:20.660 financing is hidden. The quoted APR understates 00:24:20.660 --> 00:24:22.500 the true cost because you could have probably 00:24:22.500 --> 00:24:24.619 negotiated a huge discount on the car if you'd 00:24:24.619 --> 00:24:26.400 brought your own financing. So you feel like 00:24:26.400 --> 00:24:28.099 you got cheap financing, but you really just 00:24:28.099 --> 00:24:29.619 paid a much higher price for the car itself. 00:24:29.900 --> 00:24:32.380 Exactly. The only way to know the true APR in 00:24:32.380 --> 00:24:34.339 that case would be to find out the lowest cast 00:24:34.339 --> 00:24:36.500 price the dealer would accept and then use that 00:24:36.500 --> 00:24:38.680 as the principal. Consumers almost never have 00:24:38.680 --> 00:24:41.099 that information, so the APR becomes functionally 00:24:41.099 --> 00:24:43.880 meaningless. And now we come to the fourth and 00:24:43.880 --> 00:24:47.740 maybe most controversial failing. the misrepresentation 00:24:47.740 --> 00:24:50.740 of costs for small -dollar short -term loans. 00:24:51.119 --> 00:24:53.279 like payday loans. The argument here is that 00:24:53.279 --> 00:24:56.000 APR, because it's an annualized figure, inherently 00:24:56.000 --> 00:24:59.200 exaggerates the cost of very short term products. 00:24:59.460 --> 00:25:03.440 For example, a $25 fee on a $200 loan for two 00:25:03.440 --> 00:25:06.619 weeks when you annualize it results in an astronomical 00:25:06.619 --> 00:25:09.420 APR, sometimes thousands of percent. It's mathematically 00:25:09.420 --> 00:25:11.339 correct, but it doesn't really represent the 00:25:11.339 --> 00:25:14.119 actual dollar cost for that two week period. 00:25:14.359 --> 00:25:16.599 So the tool for transparency becomes misleading, 00:25:16.900 --> 00:25:19.079 not because it's understated, but because it's 00:25:19.079 --> 00:25:21.619 dramatically overstated. for the short time frame. 00:25:21.799 --> 00:25:23.940 That's the perspective from analysts who study 00:25:23.940 --> 00:25:25.660 these products. They argue you're applying a 00:25:25.660 --> 00:25:27.660 long -term metric to a short -term product and 00:25:27.660 --> 00:25:30.160 it creates a distortion. There's a paper that 00:25:30.160 --> 00:25:32.319 argues interest rate caps, like the proposed 00:25:32.319 --> 00:25:35.740 36 % cap, overlook adverse economic effects. 00:25:36.039 --> 00:25:38.299 What are those unintended consequences of a strict 00:25:38.299 --> 00:25:41.700 36 % cap for short -term lenders? Well... The 00:25:41.700 --> 00:25:44.240 analysis suggests that when you impose caps that 00:25:44.240 --> 00:25:46.579 make the product financially unsustainable for 00:25:46.579 --> 00:25:49.019 lenders because the administrative cost is fixed, 00:25:49.160 --> 00:25:51.920 they just stop offering the product. They redirect 00:25:51.920 --> 00:25:54.900 their capital elsewhere. This leads to a scarcity 00:25:54.900 --> 00:25:57.519 of loans for the very consumers who need them 00:25:57.519 --> 00:26:01.039 for emergencies. Demand outstrips supply and 00:26:01.039 --> 00:26:03.180 it effectively becomes an implicit prohibition 00:26:03.180 --> 00:26:05.740 of the product. So while the intent is protection, 00:26:06.119 --> 00:26:08.599 the outcome might be forcing the most vulnerable 00:26:08.599 --> 00:26:11.329 borrowers toward unlicensed, unregulated and 00:26:11.329 --> 00:26:13.730 maybe more dangerous options. It's a classic 00:26:13.730 --> 00:26:16.529 regulatory balancing act. So the very tool designed 00:26:16.529 --> 00:26:19.390 for protection, when applied to broadly, can 00:26:19.390 --> 00:26:22.029 unintentionally eliminate the product, potentially 00:26:22.029 --> 00:26:24.029 harming the people it was meant to help. It's 00:26:24.029 --> 00:26:26.869 the paradox of standardization. And a final caveat 00:26:26.869 --> 00:26:29.410 is that APR also fails to capture the complexity 00:26:29.410 --> 00:26:32.109 of nonstandard mortgages like variable rates 00:26:32.109 --> 00:26:34.630 or interest -only periods. You have to make assumptions 00:26:34.630 --> 00:26:36.819 about the future. That may not come true. And 00:26:36.819 --> 00:26:38.539 to add to all this, three different lenders with 00:26:38.539 --> 00:26:41.240 the exact same cost information might still calculate 00:26:41.240 --> 00:26:44.099 three slightly different APRs. Absolutely. The 00:26:44.099 --> 00:26:47.160 calculations are complex. Most lenders rely on 00:26:47.160 --> 00:26:49.759 proprietary software. And because there are slightly 00:26:49.759 --> 00:26:52.740 different methods and rounding rules, small differences 00:26:52.740 --> 00:26:55.700 in the final APR are inevitable. So you're left 00:26:55.700 --> 00:26:57.460 with a figure that's supposed to be accurate 00:26:57.460 --> 00:27:01.480 to 0 .125%, but it's built on shifting sand. 00:27:02.190 --> 00:27:03.849 We've covered a massive amount of ground today. 00:27:03.990 --> 00:27:06.650 Our deep dive into APR reveals that what was 00:27:06.650 --> 00:27:09.329 meant to be a simple standard metric is actually 00:27:09.329 --> 00:27:12.349 this complex, multifaceted spectrum that rewards 00:27:12.349 --> 00:27:15.809 cynicism and very detailed reading of the fine 00:27:15.809 --> 00:27:18.319 print. The core learning really is that APR is 00:27:18.319 --> 00:27:20.799 not one number. It varies fundamentally between 00:27:20.799 --> 00:27:23.359 nominal and effective rates. And its definition 00:27:23.359 --> 00:27:25.720 is heavily influenced by jurisdiction, where 00:27:25.720 --> 00:27:28.140 the U .S. uses that misleading hybrid rate and 00:27:28.140 --> 00:27:30.660 the EU mandates a mathematically rigorous equation, 00:27:30.819 --> 00:27:33.279 but only for small loans. And we saw that critical 00:27:33.279 --> 00:27:35.160 flaw in the U .S. system. The difference between 00:27:35.160 --> 00:27:37.119 the quoted nominal APR and the true effective 00:27:37.119 --> 00:27:40.440 rate can cost you over $23 ,000 extra on a single 00:27:40.440 --> 00:27:42.900 mortgage. And those junk fees are often intentionally 00:27:42.900 --> 00:27:45.259 left out, ensuring the number you see always 00:27:46.569 --> 00:27:49.750 And we also established you can't use APR to 00:27:49.750 --> 00:27:53.329 compare loans of different lengths. The 15 -year 00:27:53.329 --> 00:27:55.990 versus 30 -year mortgage example proves the total 00:27:55.990 --> 00:27:57.710 interest more than doubles at the same rate. 00:27:58.109 --> 00:28:00.630 Time is often the most critical factor, not the 00:28:00.630 --> 00:28:03.950 rate. For a savvy borrower, ignoring the calendar 00:28:03.950 --> 00:28:06.170 is financial malpractice. So what does this all 00:28:06.170 --> 00:28:08.529 mean for you, the learner? We'll leave you with 00:28:08.529 --> 00:28:11.579 one final, provocative thought to consider. If 00:28:11.579 --> 00:28:14.319 the calculation of APR is so mathematically demanding 00:28:14.319 --> 00:28:17.279 that it requires sophisticated software and discretionary 00:28:17.279 --> 00:28:20.720 assumptions, and if three different honest lenders 00:28:20.720 --> 00:28:23.400 can still reach three slightly different APRs 00:28:23.400 --> 00:28:25.940 with the same information, does this complex 00:28:25.940 --> 00:28:28.400 standardization truly help the average consumer 00:28:28.400 --> 00:28:31.440 make a simpler comparison? Or is it just a regulatory 00:28:31.440 --> 00:28:33.420 hurdle that distracts you from the simpler, more 00:28:33.420 --> 00:28:36.039 vital task, adding up all the dollar amounts 00:28:36.039 --> 00:28:38.119 of the fees and the total dollar amount of interest 00:28:38.119 --> 00:28:41.259 you'll pay? That $23 ,070 difference shows the 00:28:41.259 --> 00:28:43.259 profound danger of trusting a percentage over 00:28:43.259 --> 00:28:45.460 the actual cash flow. What stands out to you? 00:28:45.539 --> 00:28:47.480 A question worth chewing on as you look at your 00:28:47.480 --> 00:28:50.160 next credit agreement. Thank you for providing 00:28:50.160 --> 00:28:52.599 the sources for this very necessary deep dive. 00:28:52.740 --> 00:28:53.700 We'll see you next time.