What is AER, APR, EAR Interest
If you need a loan the only one of these terms you need to worry about is APR.
- APR stands for Annual Percentage Rate.
- AER stands for Annual Equivalent Rate.
- EAR stands for Effective Annual Rate.
APR - Used Principally For Secured Loans, Unsecured Loans & Credit Cards.
The rate of APR quoted in your loan agreement will depend on the type of loan, e.g. whether it is a secured loan or an unsecured loan
and whether you have a good credit record or a bad credit record.
When you take out a loan, the number of repayments you must make, and the exact date they must be paid by, will be clearly stated in your
loan agreement. As these details are defined precisely, the annual rate of interest over the period of the loan can be
calculated exactly and must be shown on advertisements by law. All arrangement fees and any other costs must be included in the
calculation. You can therefore be certain that the APR quoted is a safe and sure way to compare two or more loan quotations;
the one with the lowest APR being the best value and will cost you less money.
However, you may be pressured into buying Payment Protection Insurance on the loan. This and any other optional cost is NOT covered
in the APR calculation. As the cost of this varies from company to company, sometimes quite considerably, it still pays
to shop around. Also check details like penalties for paying off the loan early as these exceptions are also NOT covered in
APR calculations.
AER and EAR
AER and EAR are essentially synonymous. AER is a calculation for interest rates that has been designed for use
with savings accounts. Some banks, but not all, use EAR for calculating the interest rates on overdrafts. Note that
if you do a search for "EAR" on the British Bankers Association website you will find that EAR is not used at
all. If your bank quotes EAR just think of it as a version of AER that has been adapted for overdrafts. For
full details please see the detailed definitions of AER, APR and EAR below.
These terms are most commonly used with savings accounts (AER) and overdrafts (EAR). For the reasons given above these
terms will be considered as having the same basic meaning. If you have an overdraft, the bank can ask you to repay it in full at any
time and the amount you have on overdraft can vary up or down from day to day. For this reason you cannot work out in advance exactly
how much interest you will be paying and what the charges will be. This is the reason why an APR cannot be
quoted. AER is a estimated simple interest rate that assumes that interest is added* yearly in arrears but allows for
the interest to be calculated at other intervals such as monthly. For this reason please note that any AER quoted is NOT
an exact or true figure as assumptions have to be made in its calculation that might not be true in your own particular case. If
this seems complicated, it is, because you cannot calculate in advance for unknown day-to-day cash flows that will happen in the
future. Banks use different formulae to calculate the AER depending on the circumstances. Banks that use
EAR will calculate it in a similar manner to AER but by using a slightly different formula.
Everyone is looking for cheap loans but a cheap loan is not necessarily the best in the long term. Choosing one with the
lowest APR is a very good start but be aware that there are still costly items that can be added to a loan that is not covered in the
APR or EAR calculations.
Generally a mortgage or remortgage will provide a loan with the cheapest rate but any secured loan should be reasonably
competitive. Unsecured loans or loans to people with a bad credit history will inevitably have high rather than low rates of interest.
* Added in the sense that money is added to the amount that you owe to the bank on an overdraft or added to the amount you
have on deposit with a savings account.
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