Please Help Apr And Ear

blacksta · 10 November 2005 at 10:50PM

Hello All

Just wondering what is the difference btw APR AND EAR, which one applies to me and how is it calculated.

thanks

grumbler · 10 November 2005 at 11:00PM

What is an APR?

This is the total cost of the loan in terms of a yearly percentage of the amount you borrow, taking into account interest payments, repayment of capital, all costs, arrangement fees, and the like, based on projections for the payments applicable during the term of a mortgage expressed as a rate of interest. It allows you to compare like with like when comparing offers from different lenders.

What is Annual Equivalent Rate (AER)?

Many savings and current accounts pay interest annually, whereas others pay monthly or quarterly. The term "Annual Equivalent Rate" (AER) means that the provider has calculated the interest rate that you would receive for a full year and enables you to compare savings interest rates on a like-for-like basis. It will not include bonus interest payments.

Main difference is :
APR - for borrowing
AER - for saving

You decide which applies to you :rolleyes:

P.S. Sorry, just realised that you wonder about EAR, not AER.

Effective Annual Rate illustrates what the annual interest would be on a debit balance where interest is compounded each year. Both APR and EAR are for borrowing. *I think* EAR for borrowing is the same as AER for saving: it does not take fees and other costs into accont, but only compounded iterest itself.
See also: http://www.businessfunctions.com/funcref.php?gentop=Annual+Equivalent+Rates

P.P.S. Just found http://www.ybonline.co.uk/0,,38863,00.html:

+EAR (Effective Annual Rate) - the effective annual rate is used to express the cost of borrowing on current accounts. The EAR takes account of the rate of interest charged, the frequency it is levied to accounts and compounding of interest. It does not include overdraft fees.

Robert_Sterling_3 · 10 November 2005 at 11:57PM

The APR is defined in the Consumer Credit Act of 1974.
It is intended to indicate the "true" rate at which you are paying interest.
This is a noble aim.
Whilst the definition given in the above post may be accurate it likely that most people are none the wiser after reading it and very few people indeed are capable of working out for themselves what the APR is for any given loan.
See if you can do this one for example.

What is the APR on a loan of £5000 for 5 years at 6.7% per annum if there is an arrangment fee of £100 which is deducted from the £5000 loan so that you only really get £4900.

The Annual Equivelant Rate is a much easier concept.

One savings account might pay 5% per annum.
The interest being paid after one year.
The interest rate is then 5% AER

However if as with Nationwide Smart Accounts the interest is paid every six months and assuming that it is quoted as being 5% per annum
then on £100 you would get £2.50 added to your capital after six months
after a further 6 months you would get interest of 2.5% on your new capital of £102.50.
i.e. You would get £2.5625

Total interest for the year on original £100 is

£2.50 +£ 2.5625 = £5.06

We say the AER is 5.06% ( Approx ).

grumbler · 11 November 2005 at 12:45AM

Blacksta, I edited my first post above ...

Please Help Apr And Ear

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