APR ? AER ? EAR ?

APR ? AER ? EAR ?
What do the terms APR, AER and EAR mean?

Do you often look at the advertisements for loans, mortgages and savings and wonder what APR, AER and EAR actually mean? Well you're certainly not alone. Even banking staff can get confused!

The Financial Services Authority specifies the exact mathematics behind these calculations and polices their use. All financial institutions have to stick to the exact calculations and the FSA lays down rules as to when and how the figures have to be disclosed. There are no exclusions! But it's no good if the public don't understand what the terms mean.

So lets do our bit to lift the mists of misunderstanding!
APR stands for "annual percentage rate"

It is used to describe the true cost of the money borrowed on mortgages, loans, and credit cards.

The calculation for APR takes into account the basic interest rate, when it is charged (i.e. daily, weekly, monthly or annually), all initial fees and any other costs you have to pay.
As all lenders calculate APR exactly the same way, it enables you to make direct cost comparisons between lending products.

So if one building society is offering you a mortgage at 4.8% plus an arrangement fee of £600 and a bank is offering you an interest rate of 5.2% with a £150 fee, then the APR figures will show you which of the two mortgages is cheapest.
There are then two further expressions that use APR.

When you see X% APR variable , this means that the cost is currently X% but the interest rate is not fixed and from time to time the interest rate is likely to vary (up or down).

The second variant is X% APR Typical variable. You'll frequently see this _expression in promotions for loans. It means that the lender is not being totally specific about the interest rate you will be charged as their rates vary, usually in response to your personal credit rating and the amount of money you want to borrow.
Therefore X% APR Typical variable is used to give you a general idea of what interest rate you can expect to pay.

The addition of the word "Typical" means that at least 66% of their approved applications are offered that rate or cheaper. Then when a loan offer is confirmed to you, the paperwork will disclose the actual APR or APR variable you are being offered.
Now lets look at EAR.

EAR is the abbreviation for "equivalent annual rate". It's used to illustrate the full percentage cost of overdrafts and any type of account that can be in credit and also go overdrawn.

The calculation shows you the true cost if you use the overdraft facility. In common with the APR calculation, EAR takes account of the basic rate of interest and when the interest is charged to the account plus any additional charges.
So in most respects EAR and APR achieve the same thing -

it's just that APR applies to a pure lending product whereas EAR applies to a product, such as a bank current account, that can be in credit or go overdrawn.

By the way, the calculations for both EAR and APR always exclude any Payment Protection Insurance you've bought to ensure the monthly repayments are maintained if you are off work due to accident, sickness or unemployment. That's because this insurance is always optional and is not a condition of the lending.
AER is totally different.

It's only used in relation to savings and interest based investments. It's all about the rate of interest you'll receive on your money.
AER means "annual equivalent rate".

It shows the true rate of interest you will have received by the end of the year taking into account the regularity of which interest is added to the account (as the payment frequency has a compounding affect on the amount of interest you receive). The AER calculation also removes the affect of any promotional offer that disappear after a few months - a popular trick used by banks and other institutions to boost their savings products to the top of the Best Buy tables.

It's not easy to remember all this but we hope we've shed some light on some of the jargon you're faced with!