The Truth in Lending Act (TILA), enacted in 1968 and implemented via Regulation Z, standardizes how lenders must disclose borrowing costs to consumers.

The Formula for Calculating APR

To convert a short-term finance charge into an annualized percentage rate:

APR = ( (Finance Charge / Principal) / Loan Term in Days ) * 365 * 100

For example, a $15 fee on a $100 loan for a 14-day term produces:

APR = ( ($15 / $100) / 14 ) * 365 * 100 = 391.07%

Nominal vs Effective Annual Rate (EAR)

While standard TILA APR represents a nominal annual rate without compounding, the Effective Annual Rate (EAR) accounts for compounding if a loan were rolled over 26 consecutive bi-weekly periods, demonstrating why avoiding rollover debt traps is mathematically imperative.