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APR, AER EAR explained

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What is APR, AER and EAR?

APR, AER & EAR - Confused by these terms? Find out what they mean and how to use them with the APR, AER and EAR definitions guide.

APR, AER & EAR

If you’ve been shopping for loans, current accounts and or overdrafts, it’s more than likely you’ve been bombarded with APRs, AERs and EARs. While they are all important in helping us decide which financial product we should opt for, most of us just don’t understand these terms and what they really mean.

To help guide you on your quest for a value-for-money financial product follow our terms guide to APR, AER and EAR to discover what they each mean and how they can help.


Annual Percentage Rate (APR) - What is APR?

APR refers to ‘annual percentage rate’. It is used by companies offering personal loans and credit cards to measure how much it will cost you, the consumer, to borrow money over the course of a year.

Every provider must quote an APR to allow customers compare products on the financial market and find out which one is best for you.

The APR includes upfront fees charged by the lender with the exception of payment protection insurance (optional cover which protects borrowers from unemployment, sickness and accidents - meaning you can’t cover the costs of your loan or credit card statement).

Lenders will commonly quote a ‘typical APR’. However APR is dependent on an assessment of your credit report and personal circumstances. This means the typical APR advertised could change due to an evaluation of your situation.

A lot of the time lenders will provide you with a ‘headline rate’. The headline rate often makes a product or deal look very attractive but this figure often excludes additional fees borrowers must pay - the APR may therefore be a lot higher than you may think. If in doubt ask your lender or double check your loan or credit card contract.

APR and How it Works

If you borrow £100 at an APR of 9%, for example, you will pay £9 in interest and charges over the first year.

Equivalent Annual Rate (EAR) - What is EAR?

EAR stands for the ‘equivalent annual rate’. The EAR applies to an overdraft or an account that can be in credit and go overdrawn - as opposed to a loan or credit card (which would receive an annual percentage rate).

The EAR lets you know how much you’re borrowing will cost you, if you were to remain overdrawn for a whole year.

The calculations include the rate of interest being charged, how often it is charged, and the effect of compounding it (charging interest on interest) over the year.

While the EAR excludes payment protection insurance the figure gives a total cost of your overdraft facility.

Annual Equivalent Rate (AER) - What is AER?

AER stands for ‘annual equivalent rate’ and is provided on savings and current accounts- which are in credit.

The AER will show you what interest you will earn from your credited account over the course of 1 year.

The AER is a good tool for comparing accounts and finding out which accounts will make the most from your savings. It will also help you differentiate between accounts which pay interest monthly and those who pay annually- allowing you to see which one will earn you the most interest on the funds in your account.

If an account includes an introductory bonus for a few months, your account providers should tell you whether or not this is in included in the AER. If it is not, looking at the AER will enable you to compare it fairly with an account that offers a level rate of interest all year.

It is worth keeping in mind that the AER is an estimated calculation and may not reflect true cash return. You may also like to look out for ‘gross’ AER and ‘net’ AER as the two are different. The gross AER is the rate of interest payable before the deduction of income tax, whereas net AER is the amount of interest payable after allowing for the deduction of 20% tax for basic rate taxpayers.

AER and How it Works

An account offering a rate of 6.25% paid annually, for example, may look more appealing than an account paying 6.12% with monthly interest payments; however the AER on the monthly account is 6.29%, as opposed to an AER of 6.25% on the account with annual interest payments.

Find more answers to Credit Card Questions and Money Saving Guides at: www.bettermoneyadvice.co.uk


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