What are APR, EAR and AER interest rates and what do they mean for your money?

Do you know the difference between APR and EAR interest? What about AER vs gross interest? There are lots of acronyms to get your head around when it comes to interest rates.
Mathew Megens
July 10, 2024
min read

If you don’t know what they are, it can be tempting to ignore them and hope for the best. But taking that approach could cost you money. For example, you might accidentally take a loan with a higher interest rate than anticipated and have to pay back a lot more than planned. Or, you might put your money in an account with a lower interest rate and miss out on earning extra money every year.

When it comes to banking, interest rates aren’t everything as some banks might compensate for a lower interest rate with other perks such as cashback offers or member rewards. However, it’s important to be aware of the terminology so that you can make an informed decision about where to put your money. And if you do have some debt, knowing how much you are paying will help you work out what the best repayment option is for you. With all the facts at your fingertips, managing money becomes a lot less stressful.

Here we’ll go through what you need to know about APR, EAR and AER; what they are, what you need to use for borrowing and saving money, and what they might mean for you.

What is APR? 

APR, which stands for Annual Percentage Rate, is something to be aware of if you’re borrowing money, perhaps on a credit card or a loan. It's basically the yearly cost of borrowing money, including interest and fees.

All lenders must tell you what an APR is before you sign a credit agreement. And you need to look at it clearly because it might differ from the “representative APR” that you saw advertised on TV or online. A "representative APR” means at least 51% of borrowers will get a rate equal to or lower than that number. The rest might be offered a higher APR based on their creditworthiness, which often means more fees for those with a lower credit rating.

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 £1,000 over 12 months, and you’re offered an APR of 13%. To figure out how much you will pay on top of the loan, you need to find out how much 13% of £1,000 is. Then, once you know the amount of interest you’ll pay, you can add it to the amount you originally borrowed. That’s how much your loan will be over a year. In this example, monthly repayments will be £1130/12, or £94.17.

What is EAR?

EAR interest means Effective Annual Rate. It’s used for loans to show the true cost of borrowing to reflect the compounding of interest. This is important because compounded interest means interest is earned on the initial amount borrowed and on any accumulated interest.

EAR interest helps you understand the true cost of borrowing. It's not just about the stated interest rate; the compounding frequency can significantly impact the total amount you repay.

How to calculate EAR interest?

There is a formula that you can use to calculate EAR interest, but unless you are a maths whizz or comfortable with financial jargon, you might think it’s a little complicated.

Calculator Soup explains the formula and gives you a tool that lets you enter your details and it will do the calculations for you.

What is AER?

AER, which stands for Annual Equivalent Rate, is the interest rate you need to know about if you are trying to save money. It tells you the potential interest you could earn in a year, including compounding. Compounding means your interest earns interest too.

Researching different AERs can help you compare saving options, including savings accounts, ISAs, bonds and investments.

How to calculate AER

As an example, if you deposit and hold £500 with a bank offering 1.5% AER, after a full year you’d receive £7.50 in interest.

Hold that balance of £507.50 for another year and, assuming the same terms apply, you’d receive a further £7.61 in interest. 

If your interest is paid monthly, you’ll need to calculate how much you’ll make in month one and then add that to your original investment to help you work out month two.

You might want to plot these values on a spreadsheet to see what your money will look like after a few years.

Or, if you want to save time, Money Saving Expert has an easy-to-use savings calculator where you can enter how much you’ll save each month and for how long.

The higher the AER paid and compounded, the more interest you could earn. But, if you withdraw money at any point, it will affect your potential interest earnings and there might be other penalties connected to the account.

What is AER vs gross interest?

AER accounts for compound interest, while the gross interest rate doesn’t. So, it’s likely that AER offers a more accurate estimate.

Since compounding is a reality in most savings accounts, AER provides a more accurate picture of your potential earnings. It reflects how often interest is paid and reinvested, giving you a better idea of what you might actually earn in a year.

If you're saving for a long-term goal, like retirement, compounding plays a crucial role. AER helps you understand the potential benefit of compound interest over time, which can be significant for long-term savings plans.

How important is AER?

The AER isn’t the be-all and end-all when comparing and managing accounts. You might also want to think about tax on savings interest. Plus, whether there may be limits or penalties for accessing your money. While the AER includes compound interest, it doesn’t cover fees and charges. For example, fees for accessing or managing your cash.

Some accounts offer promotional interest rates that apply only for an introductory period (e.g, the first six months). The AER might reflect these temporary rates, giving an inflated sense of long-term returns. After the promotional period, the interest rate may drop significantly. Also, other accounts require meeting specific conditions to earn the advertised AER, such as maintaining a minimum balance or making regular deposits. If these conditions are not met, the actual interest earned can be lower.

Can spending better be more important than AER?

As the smart spending super-app, HyperJar has done some research into how much money you could earn in a year with wiser spending choices. Using both data from the Office of National Statistics and readily available costs of products at supermarkets and bulk buy warehouses, we calculated how much it was possible to save by making different spending choices when it came to groceries, clothing, childcare, pet care and more.

Our research found that it was possible to save £2,646 a year, just by using a few smart spending hacks. You’d need to have £52,000 in a 5% AER savings account to make this in a year - and then pay tax on it.  Not many people have £52,000 available to lock-in, but everyone has the power to swap from branded items to supermarket own brands, bulk buy, stop impulse spending and make sure we don’t pay FX fees when we travel abroad.

How to spend better with HyperJar

Our integrated rewards with the country’s best known brands make it easy to add some rocket fuel to your spending power on everything from groceries, holidays and takeaways to theatre tickets. Once you’ve made the decision to pay more attention to your spending, we can help make it more rewarding, giving you more money back in your wallet at the end of a month or year.

We’re the only account to offer cashback vouchers - think gift cards for self-budgeting that give you instant money back - straight into a spending app. No waiting and no points.

Plus, open our app and you can find exclusive offers and discounts with the places you shop everyday .

There are rewards and money back for the thousands we spend each year, without the need for a rash of different apps or digging around for random coupons in kitchen drawers.

Any UK resident over the age of 16 can open a HyperJar account without a credit check and once you have an account, everyone gets the same cashback rates and rewards.

Mathew Megens

Co-Founder of HyperJar

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