Student Overdraft - Could someone please explain to me exactly what EAR means?

Gazza33

Hello everyone,

I have a student overdraft of £1500, £1250 of this is interest free, the other £250 is an 'Unauthorised Overdraft' that has an EAR of 3.5%. I need to increase my overdraft to £2000 which will be added to the EAR overdraft and will bring my EAR overdraft to £750.

I am having trouble understanding EAR. If the whole £750 EAR is taken out of my account, will I be paying approximately £26 a month or a year (3.5% of £750)?

Please could someone shine some light on this for me?

Thank you!

[Deleted User]

Equivalent annual rate. So 3.5% on the amount over a year, but calculated daily probably. Below is how the Guardian Money section desscribes it -

"Like the APR, an EAR is quoted when you are borrowing money - this time in the form of an overdraft. Unlike an APR, this doesn't include any fees for going overdrawn. Instead, it gives you an idea of how much your borrowing will cost if you were to remain overdrawn for a whole year.
The calculations take into account the rate of interest being charged, how often it is charged, and the effect of compounding it - charging interest on interest - over the year."

Gazza33

Daily? really? From what I read I thought most banks charged monthly. I'm probably utterly wrong though.

Fiddlestick

Gazza33 wrote: »

Daily? really? From what I read I thought most banks charged monthly.

They do charge it monthly, but they calculate it daily.

That may sound similar, but it's not.

Any interest will likely be calculated on your daily balance and then charged at the end of the month, so if there are any days when you are not using your overdraft then you won't have any interest calculated for that day.

[Deleted User]

Could be either. Practice varies from bank to bank, and again across credit cards, overdrafts, mortgages and so on. Daily's good if you're paying it off. Monthly's better if your debt is increasing.

Edit - much better answer from Mr Stick above.

Gazza33

Sorry for my lack of understanding. If I had used the entirety of a £250 3.5% EAR overdraft for 31 days, with no income or outgoings. Would I pay £8.75 a month?

jennifernil

that works out at only 74.32p for 31 days.

I think an overdraft is unlikely to have such a low rate.

Gazza33

So that could be £8.75 a day? Sounds obscene :S

[Deleted User]

No. It's annual. But calculated daily. ie the 3.5% is broken down into daily chunks (call it 3.5%/365 for sake of argument) and that amount is charged on the balance every day.

Gazza33

Thanks for the replies guys, I have managed to find a couple of threads that are also trying to explain what EAR is.

Are the sums on these threads approximately accurate?

http://
forums.moneysavingexpert.com/showthread.php?t=3101260&highlight=ear

http://
forums.moneysavingexpert.com/showthread.php?t=1125459

(sorry i cant post working links)

Thank you!!:j