Why APRC is misleading and how it should be reformed

Berlinger, Edina (2019) Why APRC is misleading and how it should be reformed. Cogent Economics & Finance, 7 . pp. 1-18. DOI

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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.

Item Type:Article
Uncontrolled Keywords:annual percentage rate of charge, adjustable-rate mortgages, foreign currency denominated loans, excessive risk-taking, regulation
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
ID Code:5629
Deposited By: Veronika Vitéz
Deposited On:23 Apr 2020 15:19
Last Modified:23 Apr 2020 15:19

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