Saturday, April 9, 2016

APR Adventure

APR - part I

When you want to compare two things in Java you should implement Comparable<> interface (in math it is called total order). You don't have to compute single value for one object and then second for the other to compare them. Of course in some cases this approach is even simpler, but it brings some other problem - there is no easy way to check if you are comparing apples to apples because there is no such thing as a BigDecimal<Apple>.

In real world when we want to compare sticks we will probably use the length as a measure to ease entire process. For stones we can use length of stone as a measure of "good stick and stone". As you can imagine using one coefficient for comparing sticks and stones may break my bones.

EU enforces some regulations on every company that lend money to provide single coefficient to ease consumers compare their offers.

Main problem of this approach is that it is very hard to compare two loans, because we are comparing two cashflows (in Java Map<LocalDate, BigDecimal>) using one coefficient (Java type: BigDecimal). So we are mapping map to scalar and compare those scalars. As you can imagine this is universal way of comparing apples and oranges.

For unknown reasons EU choose not easy to solve numerically measure called Annual Percentage Rate - APR.
Ak is lets say money we pay to our Customer and A'k' is money paid by Customer to us.
i in this formula is APR itself.
How hard it can be to find value of i from this formula?

Here we have first problem - this is no simple and generic method/formula to find "i". It is that hard that a lot of companies on their websites deliver wrong results to their clients (this is prohibited by the law by the way - you have to provide valid APR according to UE regulations. Those regulations are rewritten in local law and translated to many european languages, but math stays the same). 

 Let's redefine this problem a little bit. We have a situation f(x)=g(x) which we can rewrite as a f(x)-g(x)=0. This is more general problem - we have to find root of equation expressed as a sum of all payments discounted to the first day of loan.

From the API perspective we have a cashFlow defined as a Map<LocalDate, BigDecimal> and thats it! There is an opensource library to perform all those computations and provide results for mentioned API: 

APR calculator

Source code you can find here.

1 comment:

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