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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Format: | Article |
Language: | English |
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Taylor & Francis Group
2019-01-01
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Series: | Cogent Economics & Finance |
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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 |
collection | DOAJ |
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. |
first_indexed | 2024-12-21T12:33:03Z |
format | Article |
id | doaj.art-f2c8006d379e483193ae15b606eaee32 |
institution | Directory Open Access Journal |
issn | 2332-2039 |
language | English |
last_indexed | 2024-12-21T12:33:03Z |
publishDate | 2019-01-01 |
publisher | Taylor & Francis Group |
record_format | Article |
series | Cogent Economics & Finance |
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 |