Could someone please explain to me why the interest rate might be higher than the APR on a single pay loan with a 5 year maturity?

Thanks in advance!

What type interest rate product is it on?

It is a fixed rate.

I think we need some numbers to crunch.

Al

Here goes,

$25,000 single pay loan made for 5 years with a rate of 7.24% and an APR of 6.415%

I just don't understand why the apr is lower than the rate. I initially thought that it was due to the fact that it is single pay, but I still can't work that out in my mind. There is something in the back of my mind that tells me that this is possible, under certain circumstances, but I can't remember what those are.

APR's are based on annual rate.

If the payment period is longer than a year, then the yield would be lower than the rate, because the bank did not have use of the interest for any time before the maturity and payment - 5 years after the note was signed.

Right on the money, SB! The "A" in "APR" stands for annual. Reg. Z's rules for measuring time require you to divide a year into time periods corresponding with the frequency of cash flows (advances and payments)--up to one year each.

From the income perspective, your bank is losing money unless this "single payment loan" has interest payments along the way. In an interest-only deal, the APR is your yield. If a properly calculated APR comes out lower than the IR, you should require interest payments in order to maintain your yield.

From the credit administration perspective, you also improve the quality of the asset when you can see that the borrower is able to make payments in a timely manner. Waiting for 5 years to see whether the borrower can and will pay you is an unnecessary risk.

Is this why single pay cd secured loans usually charge a higher interest rate at inception to make up for the lack of use of that interest?

Thanks for your help

CD secured loans are charged a higher rate (than the CD) to have a positive yield, if that is what you mean.

What would the explanation be for the APR to be slightly less than the interest rate on a loan with biweekly payments? The only prepaid finance charge is interest for one day.

IMHO, that should not happen unless the numbers are calculated incorrectly.

We used APRWIN and it did happen, although the difference is very small (7.000 interest rate, 6.99 APR).

Could it have something to do with leap year? Your system might be charging interest based on 365 and figuring apr based on 366? Just a thought...

The APR will be different than the interest rate if your payments are calculated by the US Rule method. APRWIN makes exclusive use of the actuarial method of calculating the APR--regardless of the method used to produce the payment schedule.

Premium ARMs can also have APRs that are lower than the initial IR.

Rounding can sometimes cause a difference of a basis point, and there's always the possibility that the payment calculations are flawed. Have you verified the payments by hand & amortized the schedule to be sure it pays the balance to $0.00?