AER and APR

Pocket Money

23 Sept

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

AER and APR both allow customers to compare interest rates between financial products but they apply in different contexts.

AER (Annual Equivalent Rate) is for savings and investments. It shows how much interest you would earn over the year, taking into effect compound interest. Legally, banks and building societies must display the AER.

For example, if a bank offers two accounts with the same interest rate but one is paid every day and one is paid every month then the daily paid account would have a higher AER.

APR (Annual Percentage Rate) is for borrowing costs - on credit cards, loans and mortgages. It represents the total cost of borrowing over a year, including any mandatory fees or charges, and is expressed as a percentage. It shows what the loan actually costs to you - a lower APR shows cheaper borrowing. Lenders are also legally required to display the APR.

However, lenders only have to offer the advertised rate to 51% of successful applicants so if your credit score is low, for example, you may be offered a higher rate than advertised. Check your personalised rate before committing.

Love Eleanor. xxx

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Eleanor Burke

AER and APR

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