What is EAR and is it different from APR?
EAR stands for equivalent annual rate and, like APR, it’s an interest rate that’s used when you borrow money.
More specifically, EAR is the interest you would be charged over a year if your account were to remain overdrawn. However, EAR does not include any fees and charges, like APR does. Therefore, if you go into unarranged overdraft, your bank might charge you additionally.
As with APR, the EAR you’re offered might depend on your personal circumstances. At Starling, we use a risk-based pricing that allows us to offer rates at 15%, 25% or 35%, depending on the customer’s credit score.
How do you work out EAR?
The way EAR is calculated is slightly different from APR. EAR takes into account compound interest (interest on interest), along with the interest rate. How often it’s charged also plays a part of how it’s calculated. Many banks have calculators that will help you figure out how much an overdraft will cost you.
Read our blog post on compound interest.
Then, what does AER mean?
AER stands for annual equivalent rate. As opposed to APR and EAR, AER is used for savings. In fact, most banks will pay you to keep your money with them - and this is done through AER. The AER represents how much you would earn if you put your money in a savings account and didn’t touch it for a year.
What is Starling’s interest rate?
Starling pays 0.05% AER interest on personal current account balances up to £85,000.
How is AER calculated?
The good news about AER is that it also takes compounding into account. That means that if you put £1,000 into a savings account and get a 0.05% AER, you’ll have £1,000.50 in your account after a year. Then, at the end of the second year, you’ll get interest on your interest, as well as the original amount. This process will continue as time goes by, allowing your savings to continue to grow.
Bank accounts explained: Sort code and account number
What are IBAN, SWIFT and BIC?
What is Bacs? A guide to Bacs payments
What are Faster Payments and how to they work?
What is CHAPS? CHAPS payments explained