Interest rates : facts and fallacies
Abstract
The purpose of this paper is:
1. to discuss the methods of calculating interest rates
that are commonly used in New Zealand;
2. to present case examples showing the difference
between quoted and effective interest rates for a
number of major lending institutions; and
3. to generate discussion as to the need for effective
interest rate disclosure legislation in New Zealand.
In only one of the case examples presented is the interest
rate quoted on an effective basis. In all other cases, except where
no interest rate is quoted at all, the quoted rates are lower than
the effective rates. In one case the quoted rate is less than half
the effective rate. If the effective rates were reduced to the quoted
rates then for some of the larger loans borrowers would pay
several thousand dollars less in interest over the term of the loan.
The advent of programmable calculators and desktop computers
has greatly simplified the calculating of effective interest
rates. This should facilitate both the implementation and enforcement
of interest rate disclosure legislation. The major factor at
present preventing the enactment of interest rate disclosure
legislation appears to be the opposition of the financial institutions.
It would seem that many of these institutions have a vested interest
in maintaining the status quo.
