Yes, that is true: loans held for less time pay less, and a loan at 5% held for 2 years would pay 10% of the principal.
Using flat rates instead of APR does result in loans that cost disproportionally little when held for short periods, and disproportionally much when held for long periods. The greatest concern are cases in which a loan for an initially large amount is held for a long time after most of the initial amount has been repaid, resulting in interest calculated as a flat percentage of the original amount being applied even though most of it is no longer outstanding with the borrower. Avoiding such situations is probably the strongest argument for changing from a flat rate to an APR methodology.
We have not done so because such cases are not very frequent, and because we judged that the value of having a simple and intuitive cost calculation method outweighed the value of having a more precise model that the majority of our members would not understand in practice.