APRs (Annual Percentage Rates) are often presented as the “true cost” of borrowing, but in reality, they’re a crude, sometimes misleading measure.
Here’s why they can be inaccurate or even irrelevant depending on the product
type:
1. APR assumes long-term amortization
• APR annualizes costs but many loans (especially subprime, payday, short-term installment, or BNPL products) don’t last a year.
• A 14-day or 3-month loan
looks outrageous when its fees are annualized, but the borrower never pays for a year of credit.
• Example: A $15 fee on a $100 two-week loan translates to a 391% APR — but the borrower pays only $15, not hundreds of dollars in interest.
2. It ignores actual borrower behavior
• Borrowers often repay early, refinance, or roll over.
• APR doesn’t reflect how long the borrower actually keeps the money.
• In revolving credit, lines of credit, or overdrafts, the APR may say little about the true cost per use.
3. It excludes non-interest costs or value
• APR doesn’t include optional fees (e.g., expedited
funding, membership benefits, insurance, or credit-building value).
• It also ignores benefits that offset costs such as convenience, access when traditional credit is denied, or avoiding overdraft penalties.
4. It penalizes low-dollar, short-duration loans
• Since APR is a ratio of cost to time, compressing time and amount inflates the number.
• The same $10 fee looks like:
• 20% APR on a $1,000, one-year
loan
• 520% APR on a $100, 2-week loan
• But the borrower’s out-of-pocket expense ($10) is the same relative to their need.
5. It assumes uniform
compounding and no risk
• APR doesn’t factor in loss rates, servicing costs, or risk premiums , all of which are huge in subprime or small-dollar lending.
• It’s an accounting measure, not an economic one.
6. It fails to communicate affordability or outcomes
• Borrowers care about cash flow impact, not the theoretical annualized rate.
• “I borrow $200 today, pay
back $230 in two weeks” is clear; “391% APR” is not.
• Regulators, however, often force APR disclosures which can confuse consumers more than inform them.
Summary
APR = a standardized but distorted measure of short-term, small-dollar, or nontraditional credit.
It’s useful for comparing similar, long-term amortizing loans, but misleading for short-duration, fee-based, or revolving products.
