Why APRC is misleading and how it should be reformed

Edina Berlinger

Corvinus Economics Working Papers (CEWP) from Corvinus University of Budapest

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.

Keywords: mortgage lending; annual percentage rate of charge; adjustable-rate loans; foreign currency denominated loans (search for similar items in EconPapers)
JEL-codes: G18 G21 G28 G41 (search for similar items in EconPapers)
Date: 2017-09-10
New Economics Papers: this item is included in nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:cvh:coecwp:2017/05

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