The Truth in Lending legislation in the USA in some instances could be appropriately called the Truth in Lying legislation, because it does not properly address some mortgage issues! The following example will illustrate the point.

If you borrowed $100,000 at an annual interest rate of 6% with monthly compounding for 30 years the monthly payments would be $599.55 The effective interest rate (EIR), because of monthly compounding, would be 6.1677812%. The EIR shows the lender how much money he makes each year by reinvesting each monthly payment, at the same interest rate, as it is received.

If you borrowed $10,000 at 12% for two years, how much would the lender make at the end of two years? The EIR is 12.6825%, after one year the lender makes;

10,000 x 1.126825 = $11,268.25

and after two years the lender makes

$11,268.25 x 1.126825 = $12,697.34 which is within a penny of the negative amortization schedule below. The balance at the start of each year multiplied by 1+EIR/100 shows the lender what the investment is worth at the end of the year.