Why APRC is misleading and how it should be reformed

The annual percentage rate of charge (APRC) designed to reflect all costs of borrowing is a widely used measure to compare different credit products. It disregards completely, however, risks of possible future changes in interest and exchange rates. As an unintended consequence of the general advice...

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Main Author: Edina Berlinger
Format: Article
Language:English
Published: Taylor & Francis Group 2019-01-01
Series:Cogent Economics & Finance
Subjects:
Online Access:http://dx.doi.org/10.1080/23322039.2019.1609766
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author Edina Berlinger
author_facet Edina Berlinger
author_sort Edina Berlinger
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description The annual percentage rate of charge (APRC) designed to reflect all costs of borrowing is a widely used measure to compare different credit products. It disregards completely, however, risks of possible future changes in interest and exchange rates. As an unintended consequence of the general advice to minimize APRC, many borrowers take adjustable-rate mortgages with extremely short interest rate period or foreign currency denominated loans and run into an excessive risk without really being aware of it. To avoid this, we propose a new, risk-adjusted APRC incorporating also the potential costs of risk hedging. This new measure eliminates most of the virtual advantages of riskier structures and reduces the danger of excessive risk-taking. As an illustration, we analyze the latest Hungarian home loan trends with the help of scenario analysis.
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spelling doaj.art-f2c8006d379e483193ae15b606eaee322022-12-21T19:03:59ZengTaylor & Francis GroupCogent Economics & Finance2332-20392019-01-017110.1080/23322039.2019.16097661609766Why APRC is misleading and how it should be reformedEdina Berlinger0Corvinus University of BudapestThe annual percentage rate of charge (APRC) designed to reflect all costs of borrowing is a widely used measure to compare different credit products. It disregards completely, however, risks of possible future changes in interest and exchange rates. As an unintended consequence of the general advice to minimize APRC, many borrowers take adjustable-rate mortgages with extremely short interest rate period or foreign currency denominated loans and run into an excessive risk without really being aware of it. To avoid this, we propose a new, risk-adjusted APRC incorporating also the potential costs of risk hedging. This new measure eliminates most of the virtual advantages of riskier structures and reduces the danger of excessive risk-taking. As an illustration, we analyze the latest Hungarian home loan trends with the help of scenario analysis.http://dx.doi.org/10.1080/23322039.2019.1609766annual percentage rate of chargeadjustable-rate mortgagesforeign currency denominated loansexcessive risk-takingregulation
spellingShingle Edina Berlinger
Why APRC is misleading and how it should be reformed
Cogent Economics & Finance
annual percentage rate of charge
adjustable-rate mortgages
foreign currency denominated loans
excessive risk-taking
regulation
title Why APRC is misleading and how it should be reformed
title_full Why APRC is misleading and how it should be reformed
title_fullStr Why APRC is misleading and how it should be reformed
title_full_unstemmed Why APRC is misleading and how it should be reformed
title_short Why APRC is misleading and how it should be reformed
title_sort why aprc is misleading and how it should be reformed
topic annual percentage rate of charge
adjustable-rate mortgages
foreign currency denominated loans
excessive risk-taking
regulation
url http://dx.doi.org/10.1080/23322039.2019.1609766
work_keys_str_mv AT edinaberlinger whyaprcismisleadingandhowitshouldbereformed