Lesson 6 of 25 · 6 min
Penalty rates: how APR steps up
A penalty rate is a spread revision on the same person after a clocked test fails.
A penalty rate is lesson 3's step, held still long enough to see the year. The $4,280 that was $78.43 a month at 21.99 percent is $106.96 a month at 29.99 percent. Extra is $28.53 a month, which is $28.53 × 12 = $342.36 a year. The person did not change. The collateral, such as it is on an unsecured card, is still that person. The spread was revised after a clocked test failed.
Scale the same eight-point step onto a $12,400 personal-loan-sized card balance. Extra is $12,400 × 0.08 ÷ 12 = $82.67 a month. The $12,400 is unchanged. Eight points of spread on a larger principal is a larger monthly product, which is the whole of the machine: the revision is a rate, so it scales with the balance it is applied to.
Track 5 lesson 4 is an advance-rate revision: after a test fails, the lender reprices the same collateral. A penalty APR is that revision in another wrapper. The collateral is the person. The test is the delinquency clock. The new number is a larger spread on the same outstanding. It is not a new loan, and it is not a recommendation to do anything with the old one.
Eight points on $4,280 is $28.53 a month, $342.36 a year. Eight points on $12,400 is $82.67 a month. The step is a spread. It scales with the balance.
Key terms
- Penalty APR
- A higher annual rate some agreements apply after a stated number of failed buckets. A spread revision.
- Eight-point step
- 21.99 percent to 29.99 percent in this invented book. Extra is the balance times 0.08 divided by 12.
- Reprice of the same person
- Track 5 lesson 4's advance-rate revision, pointed at a borrower rather than at pledged securities.
Worked example
The same eight points, two balances
Illustrative figures scaled down so the arithmetic is followable; they are not the reported amounts. A step from 21.99 percent to 29.99 percent on $4,280 and on $12,400.
- Extra on $4,280, per month
- $28.53
- Extra on $4,280, per year
- $342.36
- Extra on $12,400, per month
- $82.67
- What did not change
- The person, the balance
$106.96 − $78.43.
$28.53 × 12.
$12,400 × 0.08 ÷ 12.
The spread changed.
The step is eight points of spread. On $4,280 it is $342.36 a year. On $12,400 it is $82.67 a month. Same revision, scaled.
Check yourself
An invented card steps from 21.99 percent to 29.99 percent. What is the extra monthly interest on $4,280, the extra yearly interest on that $4,280, and the extra monthly interest on $12,400?
A penalty rate is a spread revision triggered by the clock, Track 5 lesson 4's advance-rate revision in another wrapper: the lender reprices the same collateral — here, the same person — after a test fails. Open Term four: advance rates are assigned and can be revised →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.