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APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
APR vs Total Cost of Credit
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APR vs Total Cost of Credit

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This presentation provides an overview of two ways of communicating the price of a loan: Annual Percentage Rate (APR) and Total Cost of Credit (TCC). It explains advanages and disadvantages of each, …

This presentation provides an overview of two ways of communicating the price of a loan: Annual Percentage Rate (APR) and Total Cost of Credit (TCC). It explains advanages and disadvantages of each, ultimately illustrating why APR is a more transparent way of communicating the cost of borrowing.

Published in: Economy & Finance, Business
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  • Cover slide
  • Ask for raised hands. How did you decide?
  • Ask for raised hands. How did you decide?
  • Ask for raised hands. How did you decide?
  • Ask for raised hands. How did you decide?
  • Ask for raised hands. How did you decide?
  • (flat interest rate)
  • Ask for raised hands. How did you decide?
  • Ask for raised hands. How did you decide?
  • Ask for raised hands. How did you decide?
  • (declining balance)
  • Let the audience discuss
  • Cover slide
  • Transcript

    • 1. Promoting Transparent Pricing in the Microfinance Industry<br />APR vs Total Cost of Credit<br />June 2011<br />
    • 2. How to measure true prices?<br />The microfinance industry is committed to measuring true prices in a consistent and transparent way so that different financial products can be accurately compared.<br />But what method should we use? There are various approaches available, each with strengths and limitations. This presentation will compare APR and TCC.<br />
    • 3. Definitions of TCC and APR<br />
    • 4. The Myth About APR<br />
    • 5. The Myth About TCC<br />
    • 6. Let’s take a Test!<br />To learn more about the strengths and weaknesses of TCC and APR, let’s try some comparisons.<br />Go thru the following quiz. <br />On each screen, compare the two options and pick the one you believe is lower cost.<br />Then click to proceed and view the answer. <br />What process did you have to go through to make your choice? <br />Did you get it right? <br />If you made the wrong choice, why?<br />
    • 7. Which would you buy?<br />$1<br />$2<br />
    • 8. Which would you buy?<br />$2<br />$1<br />1 liter<br />3 liters<br />
    • 9. Processing the Results<br />Other than the price, what additional information did you need to make a decision?<br />How did you combine the different pieces of information?<br />Now let’s try some loans…. (and in these, we assume all repayment schedules are consistent, which is not true in real life!)<br />
    • 10. Which would you buy?Example 1<br />
    • 11. Which would you buy?Example 1<br />
    • 12. Which would you buy?Example 2<br />
    • 13. Which would you buy?Example 2<br />
    • 14. Which would you buy?Example 3<br />
    • 15. Which would you buy?Example 3<br />
    • 16. Processing the Results<br />How did you do on the first three examples?<br />In each example, at most one of the two parameters changed – loan amount or term<br />What did you have to do to compare the TCC and determine the lower price?<br />Now we’ll see an example where both amount and term differ…<br />
    • 17. Which would you buy?Example 4<br />
    • 18. Which would you buy?Example 4<br />
    • 19. Processing the Results<br />Was that a bit more difficult?<br />In all of the examples so far, does the APR give a useful answer without any additional calculation?<br />The examples so far only assume two issues – loan amount and loan term. What happens if we add other factors? Does TCC pricing get even more difficult?<br />
    • 20. Which would you buy?<br />Example 5<br />
    • 21. Which would you buy?<br />Example 5<br />
    • 22. Which would you buy?<br />Example 6<br />
    • 23. Which would you buy?<br />Example 6<br />
    • 24. Now which?Example 7<br />
    • 25. Now which?Example 7<br />
    • 26. Why didn’t <br />Total Cost of Credit<br />work?<br />
    • 27. Purchasing vs Renting<br />
    • 28. So why do governments and textbooks use APR as a measure of true price and not “Total Cost of Credit”? <br />
    • 29. Perception and Reality<br />
    • 30. Perception and Reality<br />
    • 31. Perception and Reality<br />When properly explained the APR is really quite simple!<br />
    • 32. The Reality<br />
    • 33. Practicing Full Disclosure<br />
    • 34.
    • 35. Learning More<br />You can learn more about the different approaches to measuring transparent prices at www.mftransparency.org<br />The best place to start is Session 1: Building the Foundation for Understanding Transparent Pricing(http://www.mftransparency.org/pages/category/resources/understanding-transparent-pricing/)<br />
    • 36. Promoting Transparent Pricing <br />in the Microfinance Industry<br />

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