Is APR a Robust Measure of the Cost of Consumer Credit?
23 Pages Posted: 19 Apr 2013
Date Written: April 18, 2013
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 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. This article uses a new interpretation of the time value of money equation to challenge conventional analysis. A mathematical argument demonstrates that the simple rate of interest is a more effective policy variable than APR.
Keywords: annual percentage rate, APR, consumer credit, complex plane, time value of money, finance charge, truth-in-lending, TVM
JEL Classification: C02, G20, G21, G28
Suggested Citation: Suggested Citation
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