Corvinus
Corvinus

Why APRC is misleading and how it should be reformed

Berlinger, Edina (2017) Why APRC is misleading and how it should be reformed. Working Paper. Corvinus University of Budapest Faculty of Economics, Budapest.

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Abstract

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 present the latest Hungarian home loan trends but lessons are universal.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2017/05
Uncontrolled Keywords:mortgage lending, annual percentage rate of charge, adjustable-rate loans, foreign currency denominated loans
JEL classification:G18 - General Financial Markets: Government Policy and Regulation
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G28 - Financial Institutions and Services: Government Policy and Regulation
G41 - Behavioral Finance: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
Subjects:Finance
Funders:János Bolyai scholarship program of the Hungarian Academy of Sciences
ID Code:3040
Deposited By: Ádám Hoffmann
Deposited On:11 Sep 2017 15:00
Last Modified:11 Sep 2017 15:02

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