Why APRs Don’t Work for Small Loans or Small Amount Credit Contracts (SACCs)

An Annual Percentage Rate (or APR) is a unit of measurement for the rate charged on credit, generally expressed as a percentage. In relation to interest rates, it is representative of the yearly costs of funds over the term of a loan.

So why does APR not work for small loans when a borrower wants to understand how much their small loan will cost them?

1. An Annual Percentage Rate does not become meaningful until a loan is set up for more than 12 months as it is calculated annually.  Small loans (SACCs) are payable between 16 days and 1 year – therefore there is no meaningful annual percentage rate. APR values are distorted for SACC loans, which are all repaid under 1 year.

2. Small loan contracts under $2,000 are typically paid back in 4 months therefore APR calculations don’t work for SACCs or small loans which are all for less than 12 months.

Here is what customers really want to know about the cost of their small loan.

  • How much the loan will COST them (the cost is the fees and charges)
  • What the weekly/fortnightly/monthly repayment amount will be
  • How many repayments will be needed
  • How much they will have to repay in total (the original loan amount plus the fees and charges)

When lenders tell their borrowers in a clear and understandable language, a consumer can fully understand what they need to pay and when, so they can successfully repay their loan.

Do other industries use annual rates for their products and services?

If you compare annual rates in other industries, you’ll get the picture. The hotel and parking sectors don’t advertise an annual rate for their services. Imagine if consumers were quoted annual rates when paying for HOTEL ROOMS? Instead of $195 per night it would be $71,175 per annum. What if consumers were quoted annual rates when paying for PARKING? Instead of $13 per hour it would be $113,880 per annum.



APR is a meaningless measurement in these industries as well as for SACCs or small loans.

That’s why NCPA is calling for the government to ban APRs being quoted for loans under 12 months.

CLICK HERE for more information about small loans (SACCs) and the APR. Or visit smallloansbigneed.com.au for more information about the small loans (SACC) industry in Australia.