APR Calculation on a Demand Loan
by Andy Zavoina, BOL Guru
Question: How do you calculate the APR on demand loans?
Answer: Look to 226.17(c)(5) "If an obligation is payable on demand, the creditor shall make the disclosures based on an assumed maturity of 1 year.
If an alternate maturity date is stated in the legal obligation between the parties, the disclosures shall be based on that date."
A few years ago this created some controversy as tax refund loans were disclosed in this manner because the repayment was the tax refund and its exact delivery date was an unknown and the creditor based repayment solely on that. They disclosed based on one-year, but knew it would be satisfied in a matter of weeks. This was not a good practice and was misleading. The APR was greatly reduced based on a longer term assumption.
First published on BankersOnline.com 3/15/04
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