How to Read Interest Rate Paid by The Poor

You may often hear this as argument against informal moneylenders to the poor: they charge exorbitant annual interest rate. For example, IDR 2500 a week for IDR 100K loan means 261 percent annualized interest rate.

But that's not quite accurate.

One of the lessons from the diaries is that interest paid on very short-duration loans is more sensibly understood as a fee than as annualized interest. When researchers annualize all interest rates, they maybe following standard accounting practices, but distorting the real picture.

--Portfolios of the Poor by Collins, Morduch, Rutherford, Ruthven, p.22

What is the real picture? For instance, paying that interest, --no, fee--, will enable a poor to buy new cloth for his/her kid to celebrate Eid festival. A very rational motive. And perhaps, thinking at annual base is a luxury for the poor.