Rethinking the APR

The Annual Percentage Rate (APR) became the standard credit disclosure requirement in the US under the Truth in Lending Act in 1968. Nearly 60 years later, the credit market looks fundamentally different, but disclosure requirements have changed relatively little.

In 1968, 85% of consumer credit was directed towards purpose-specific loans, such as vehicle purchases and personal loans. Today, 32% of consumer credit supports everyday spending and short-term liquidity, up from 15% in 1968.

New credit products, including Buy Now, Pay Later (BNPL) and platform-based lending, have emerged to meet increasingly diverse consumer and small business needs. However, traditional APR disclosures do not always communicate the cost of these products effectively. Mandala's analysis finds that APR disclosures can create a disproportionately high perception of borrowing costs, particularly for short-duration credit products.

A survey of 1,597 US consumers and small business decision-makers found that the way borrowing costs are presented can materially influence consumer preferences. In a hypothetical scenario involving an unexpected $500 expense, BNPL was the least expensive credit option based on likely borrowing costs. However, it ranked fourth in consumer preferences when costs were disclosed using APRs, compared with second under Total Cost of Credit (TCC) and first under Typical Realized Cost (TRC).

The findings suggest that disclosure requirements may influence consumers towards higher-cost borrowing alternatives, rather than helping them identify the most suitable product for their needs.

The research finds that no single disclosure metric is best suited to every credit product. While APRs remain useful for comparing many traditional lending products, alternative approaches such as total dollar costs or cost per $100 borrowed may be more appropriate for some short-term products. Policymakers should adopt a more flexible, product-specific disclosure framework that builds on the foundational consumer protection principles of transparency, comparability and comprehension, while recognising access to credit as an additional consideration.

Read and download the full report here.