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I'm trying to understand the difference between the actuarial method and the U.S. Rule for calculating interest. I think the difference is that the actuarial rule adds unpaid interest to the principal balance and the US Rule does not. So the actuarial rule allows the charging of compound interest.

But I'm reading Neifeld's Guide to Instalment Computations (a book by an economist at a major lender back in the `50s) and it says this:

“The United States Rule prescribes the actuarial method. The rule is in essence a decision on the application of partial payments, their apportionment between charge and principal being the point at issue. Interest is computed on the unpaid balance, at the stated rate, for the elapsed time; it is equal to the action of the principal for one period multiplied by the stated rate. In instalment repayments, whether a discount or an add-on transaction, the actuarial method computes the rate which meets the condition of the United States Rule.” at 325

The first and last sentence of the above quote really confuses me - it sounds like the actuarial method and US rule are the same thing. But is he using "actuarial method" to refer to something else? For example, on another page in the book (p149), it describes the actuarial method as one of several ways "of distributing the credit cost in the amortization of a debt" (along with the direct ratio method, constant ratio method, and others).

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  • $\begingroup$ Interesting question. You need an expert in Regulation Z, which I am not. But I wouldn't rely on a book from 1951 as TILA and Reg Z are from 1968 and 1976 and that's where the distinction between the US rule and the Actuarial Rule were described and they were both approved for use. $\endgroup$
    – nbbo2
    Jun 2, 2016 at 16:49
  • $\begingroup$ I think the US Rule is much older than Reg Z. But, regardless, I have looked at it and I don't think it creates anything new. Appendix J (a)(1) just says you can use either the US Rule or the actuarial method. So, now that you mention it, Reg Z also treats the 2 things as different. So that makes me think that Neifeld was referring to a different concept of "actuarial method" (is there a diferent one?), or his writing was just really bad. $\endgroup$
    – WebUserLearner
    Jun 2, 2016 at 18:46

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