Abstract
Most people have consumer loans during their lives, making it important that consumer credit legislation is effective. Legislation in many countries is based on the US Truth-in-Lending Act (TILA). Conventional financial analysis underlying the TILA argues that the annual percentage rate (APR) is the best measure of credit cost, and therefore the legislation focuses on APR as a key policy variable. APR is a complicated concept, so the legislation is complex and research shows consumers find APR confusing. Th is chapter uses multiple-interest-rate analysis to challenge conventional analysis and demonstrate that the simple rate of interest is a more eff ective policy variable than APR.
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Notes
In the EU the total amount repaid is known as the total charge for credit (TCC); and it is the TCC rather than the FC that is quoted to consumers alongside the APR.
The source for this quote is chosen because it is a recent, well-written, and detailed statement of the conventional analysis of APR. Other documents, chosen from similar literature from other jurisdictions, could serve as an example.
Examination of equation (4.5) can be taken a step further by assuming a third meaningful value of X to enter into the equation, namely, the cost of funds. However, this particular analysis is relegated to Annex 4C because, although the analysis is illuminating, it is not vital to the main argument.
Strictly speaking, it is necessary to increase the Macaulay duration of the cash fl ows with a twist. However, the two sets of cash fl ows are closely related because they have (n–1) roots in common, and therefore manipulating the Macaulay duration of the cash fl ows is a good first approximation.
A source of information about auto loans is the local press. Newspaper adverts through the years could be a source of data to include in a test of the hypothesis.
The research conducted for the EU Commission mentioned in the final paragraph of Annex 4A is a likely source of data for this test.
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© 2014 Michael J. Osborne
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Osborne, M. (2014). Is APR a Robust Measure of the Cost of Consumer Credit?. In: Multiple Interest Rate Analysis: Theory and Applications. Palgrave Pivot, London. https://doi.org/10.1057/9781137372772_4
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DOI: https://doi.org/10.1057/9781137372772_4
Publisher Name: Palgrave Pivot, London
Print ISBN: 978-1-349-47627-5
Online ISBN: 978-1-137-37277-2
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