What does 17.81% EAR actually mean?

katen_3

My boyfriend received a letter from Natwest this week, stating that his Graduate Account is about to end on the 15th of July 2008.

He currently has an over-draft of £2000 which he reaches the brink of each month after bills have come out etc.

The letter from Natwest states that his over-draft will now be charged at 17.81% EAR, opposed to it being free previously.

Could somebody please explain to us what this actually means? Does it mean he will be charged 17.81% of £2000 each month?! In that case, we'll be looking at over £350 of interest per month!!!

Are we being silly? Have we got our numbers wrong? If someone could please help explain this to us we'd be very grateful.

We would love to pay his overdraft off, but we're pretty much living on the bread-line as it is at the moment so times are hard.

Thank you in advance

natweststaffmember

EAR is the abbreviation for "equivalent annual rate". It's used to demonstrate the full percentage cost of overdrafts and accounts that can be in credit and also go overdrawn. The calculation accurately illustrates the cost of the overdraft facility. In common with the APR calculation, EAR takes into account of the basic rate of interest charged, when the interest is charged, plus any additional charges. So in most respects EAR and APR do the same thing – it's just that APR applies to pure lending products whilst EAR applies to a product, such as a banking current account, that can be held in credit or go overdrawn.

http://www.buzzle.com/editorials/1-31-2006-87774.asp
That was my source of the above information.
It is about 1.5% monthly on the amount. Did he complete his studies 3 years ago?

YorkshireBoy

Definition of EAR here: http://www.natwest.com/personal/day-to-day/current-accounts/g5/rates-charges.ashx

The 'A' in EAR stands for 'annual'.

The overdraft interest will be calculated each day. The gross rate (uncompounded, which compounds up to 17.81% EAR) used is 16.50%.

So, interest will accrue on the account each day at the rate of...

Closing balance x 16.50% / 365

So, assuming an average balance of £1,000 throughout the month, the debit interest to be applied at the end of the month will be...

£1,000 x 16.50% / 365 x 31 (for July) = £14.01

YorkshireBoy

natweststaffmember wrote: »

EAR is the abbreviation for "equivalent annual rate".

"Effective", according to the NatWest definition. Is there a difference?

In common with the APR calculation, EAR takes into account of the basic rate of interest charged, when the interest is charged, plus any additional charges.

Not according to the NatWest definition, and that of Yorkshire Bank, it doesn't. From NatWest...

Effective Annual Rate of Interest (EAR). This is the real annual cost of an overdraft, stated as an annual rate, which takes into account how often interest is charged to the account. All other charges, such as arrangement fees, must be shown separately from the EAR.

katen_3

natweststaffmember wrote: »

EAR is the abbreviation for "equivalent annual rate". It's used to demonstrate the full percentage cost of overdrafts and accounts that can be in credit and also go overdrawn. The calculation accurately illustrates the cost of the overdraft facility. In common with the APR calculation, EAR takes into account of the basic rate of interest charged, when the interest is charged, plus any additional charges. So in most respects EAR and APR do the same thing – it's just that APR applies to pure lending products whilst EAR applies to a product, such as a banking current account, that can be held in credit or go overdrawn.

http://www.buzzle.com/editorials/1-31-2006-87774.asp
That was my source of the above information.
It is about 1.5% monthly on the amount. Did he complete his studies 3 years ago?

Ahh - ok - well, we're obviously not over the moon about the interest, but at least we calculated it entirely wrong, so we're not paying out £100s a month!

Yep, he did finish is studies 3 years ago. Thank you for your help and for replying

katen_3

YorkshireBoy wrote: »

Definition of EAR here: http://www.natwest.com/personal/day-to-day/current-accounts/g5/rates-charges.ashx

The 'A' in EAR stands for 'annual'.

The overdraft interest will be calculated each day. The gross rate (uncompounded, which compounds up to 17.81% EAR) used is 16.50%.

So, interest will accrue on the account each day at the rate of...

Closing balance x 16.50% / 365

So, assuming an average balance of £1,000 throughout the month, the debit interest to be applied at the and of the month will be...

£1,000 x 16.50% / 365 x 31 (for July) = £14.01

Thank you for this explanation, it all makes a lot more sense now! We'll have to work on paying his overdraft off now, but I guess for us finding just the £30 a month to cover the interest is going to be hard enough as it is... it's obviously our fault for getting in to debt whilst students, but I must admit, money was very easy to borrow when we were studying

Thanks again

YorkshireBoy

katen wrote: »

...finding just the £30 a month to cover the interest is going to be hard enough as it is...

Pushing the bills back to the end of the month will keep the balance higher (or less negative, if you see what I mean!) throughout the month, and so reduce the amount of debit interest charged.

Does that make sense?

katen_3

YorkshireBoy wrote: »

Pushing the bills back to the end of the month will keep the balance higher (or less negative, if you see what I mean!) throughout the month, and so reduce the amount of debit interest charged.

Does that make sense?

Yep, that does make sense, I never thought about it like that though Hmmm, I guess the biggest thing that comes out of his account though is the rent, at £550, which unfortunately comes out right at the start of each month (the 5th) and we can't change that due to the letting agents... but we'll look in to all other payments we make out of his account - thanks for the tip!