When it comes to borrowing and saving money, you almost certainly have to add interest rates to the equation. But for some, interest rates are often hard to understand, perhaps especially because they go under confusing acronyms, such as APR, EAR and AER.

However, it’s very important that you’re aware of the different representations of interest rates - whether you’re considering taking out a loan, applying for an overdraft or looking for a savings account, you’ll want to be confident you fully understand the rate you’re receiving or paying.

Here we’ll go through what you need to know about APR, EAR and AER; what they are, how they’re used and what they might mean for you.

What is APR?

APR stands for annual percentage rate, and it’s a rate that helps you understand how much it will cost you to borrow money over a year, including interest and other potential fees.

APR is a standardised way to illustrate the cost of borrowing and all lenders, such as banks and other financial institutions, are required to tell their customers what their ‘representative’ APR is.

What is ‘representative’ APR?

When a bank advertises with a representative APR (e.g. in regards to a loan), it means that it has to offer that rate to at least 51% of customers who are successful in their loan application. The other 49% are likely to be offered a different (usually higher) APR.

The representative APR is useful for people who are comparing loans on the market, because it provides an easy way to assess the different loans on offer. However, it’s not guaranteed that you’ll receive the representative APR on your loan application - that will always depend on your personal circumstances.

What is personal APR?

As opposed to representative APR, personal APR is the actual rate you’re offered. Personal APR takes into account your financial situation, credit history, how much you want to borrow and over what period. Depending on your eligibility, your personal APR can be equal to (or better than) the representative APR, but it can also be higher. You might not know your personal rate until after you’ve submitted your loan application, so it’s important to be aware of this. At Starling, we’ll let you know your rate in advance.

How to calculate APR

Many banks and loan providers have calculators and other tools to help you figure out how much you need to pay back, but let’s say you want to borrow £2,000 for a duration of 12 months, and you’re offered an APR of 11.5%. To figure out how much you will pay on top of the loan, you need to find out how much 11.5% of £2,000 is. Then, once you know the amount of interest you’ll pay, you can add it to the amount you originally borrowed. That’s the full price of your loan over a year.

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.

With our Fixed Saver you can lock away savings for a year and earn 5.53% AER interest on balances from £2,000 up to £1,000,000.

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.

Other resources

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

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