Under the federal Truth in Lending Act (TILA) and Consumer Financial Protection Bureau (CFPB) Regulation Z, all consumer credit providers must express finance charges as an annualized percentage rate (APR).
1. The Formula for Annualizing Short-Term Finance Fees
The Standard TILA Annualization Formula
APR = (Finance Charge / Principal) × (365 / Loan Term in Days) × 100
| Loan Amount (Principal) | Flat Finance Fee | Loan Duration | Nominal 14-Day Rate | Annualized APR (TILA) |
|---|---|---|---|---|
| $100.00 | $15.00 | 14 Days | 15.00% | 391.07% APR |
| $300.00 | $45.00 | 14 Days | 15.00% | 391.07% APR |
| $500.00 | $75.00 | 14 Days | 15.00% | 391.07% APR |
| $500.00 | $100.00 ($20/$100) | 14 Days | 20.00% | 521.43% APR |
| $1,000.00 (Installment) | $220.00 Total Interest | 90 Days | 22.00% | 89.22% APR |
2. Why APR Comparison is Critical for Borrowers
While a $15 charge on a $100 loan may appear manageable as a flat dollar amount, calculating APR enables consumers to objectively evaluate alternative credit products such as credit card cash advances (29.99% APR) or credit union PALs (28.00% APR).