Following the release of The Competitive Enterprise Institute’s new report Online Lenders Alliance issued the following statement from Director of Research and Policy, Justin Fisk
“The Competitive Enterprise Institute’s new report on APR and short-term loans reinforces a critical and often misunderstood point: annual rate calculations are irrelevant and misleading when applied to loans with a repayment period of less than a year. While APR can be a useful way to compare the cost of credit on long-term, high-dollar lending products, it is the wrong metric—as an annualized calculation—to gauge the cost of short-term loans. Simple math realities dictate that any loan repaid in less than one year is going to carry an APR that is exponentially higher. For example, a $100 loan carrying $1 in interest that is repaid in one year carries an APR of 1 percent; that same $100 loan with the same $1 in interest repaid in one day carries an APR of 365 percent. The amount of principal and interest are the same; the only variable is time.
“OLA members promote a diverse and responsible marketplace for innovative online financial products and services while expanding access to credit for all consumers- including those who are financially underserved. Using APR as the sole measure for the legality and morality of these products is not only misleading, it serves to eliminate safe, regulated credit access for millions of non-prime American consumers who need it.”