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Why APRC is misleading and how it should be reformed

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  • Berlinger, Edina

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.

Suggested Citation

  • Berlinger, Edina, 2017. "Why APRC is misleading and how it should be reformed," Corvinus Economics Working Papers (CEWP) 2017/05, Corvinus University of Budapest.
    • Handle: RePEc:cvh:coecwp:2017/05
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    File URL: https://unipub.lib.uni-corvinus.hu/3040/
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    Cited by:

    1. Júlia Király, 2020. "Hungary and Other Emerging EU Countries in the Financial Storm," Financial and Monetary Policy Studies, Springer, number 978-3-030-49544-2, February.

    More about this item

    Keywords

    mortgage lending; annual percentage rate of charge; adjustable-rate loans; foreign currency denominated loans;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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