The EIR is more relevant for borrowers who are short of income, because it computes the effects of compounding assuming no periodic payment of interest, so that future interest accrues on both the principal and the current interest. However, the APR reflects the annual total interest charge assuming periodic interest is paid as soon as it accrues. For example, if one borrows a principal debt of $1000 at an interest of 2% every month, and makes no monthly payments, the compounded debt at the end of the year is $1000 × (1.02)12 = $1268.24, or $268.24 of interest, making EIR 26.8%. By contrast, if the interest of $1000 × 0.02 = $20 is paid each month, but none of the principal, the annual interest is $20 × 12 = $240, making APR 24%.
