What are the differences between APR in Europe and the U.S.?

The annual percentage rate of a loan is the measurement of how expensive it is to borrow money over the course of one year. There are several other measurements of borrowing expense – the effective annual rate, the annual equivalent rate and the annual percentage yield, among others. APR is considered to be one of the most important, because it includes fees and other expenses associated with lending agreements, not just interest rates.

There are differences in how APR is calculated based on the regulations that govern the lending institution. In the United States, the calculation and subsequent disclosure of any APR is governed by the Truth in Lending Act (TILA). The European Union regulates APR through two directives, 2008/48/EC and 2011/90/EU, but significant uniformity between member nations was not really instituted until 2013.

APR in the U.S.

For American lenders, APR is specified to mean the nominal interest rate adjusted to include certain non-interest costs. The types of costs that can be charged are not specifically regulated by TILA, but the requisite disclosures are. By law, credit issuers must clearly display the APR to their customers. Credit card companies are allowed to display monthly interest rates instead of annual interest rates, but no agreement may be signed without some disclosure of the annual rate.

Mortgages have their own APR disclosure requirements in the U.S. Under the Mortgage Disclosure Improvement Act of 2008, final APR cannot vary more than 0.125% from the good faith estimate, or else the transaction must be delayed and a new APR disclosure is required.

APR in Europe

European laws also highly emphasize disclosures with regard to APR. There is a specific algorithm used in E.U. APR calculations that presumes a 365-day year with 12 equal months. These calculations do not apply to every loan, however. Any loans in excess of €50,000 (as of 2014) do not have to use the standard algorithm, and no mortgages are required to use it.

Directive 2008/48/EC is also known as the Consumer Credit Directive in the E.U. This directive establishes the Standard European Consumer Credit Information, which is a series of disclosures that have to be provided to customers before the lending contract is signed. Directive 2011/90/EU is an amendment to prior APR calculations, and it provides different assumptions that must be applied by any simulated APR figures.

The United Kingdom is not a full member of the EU, and it does not have to comply with all E.U. directives. The U.K. Consumer Credit Act of 1974 regulates the use of APR by British lenders, and it requires that APR be published in a prominent and visible way for any loan. All regulations on lending rates and disclosures are overseen by the Financial Conduct Authority.

All of these rates are nominal. Lenders do not typically build in assumptions to account for the effect of inflation on borrowing power and borrowing costs.