Help: AER v's APR

afeliciello · 29 October 2005 at 8:57PM

Hi was wondering if there was anyone out there who could give some advice.

What is the difference between AER and APR. I have read the definitions banks etc give but what are their true meaning in relation to one another. For example, if I bought something for £20,000 on 6.9% APR (3.25% base rate), if I had that money in the bank what sort of AER rate would I need to be earning such that the finance deal was more profitable for me than spending my own cash? :think:

Thanks.
A

Robert_Sterling_3 · 29 October 2005 at 11:08PM

As you may know in general the APR is greater than the AER.

You introduce an item which is new to me the "bae" rate which you say is 3.25% whereas the APR is 6.9%.

What does "bae" rate refer to.

afeliciello · 30 October 2005 at 9:28AM

Sorry! Typo I meant base rate, post edited.
Thanks.

Robert_Sterling_3 · 30 October 2005 at 10:19AM

What base rate are we talking about here.

Not the current bank rate which I think is 4.5%

afeliciello · 30 October 2005 at 12:38PM

This all came up during negotiations on a new car. He may have said basic rate as opposed to base.

afeliciello · 30 October 2005 at 9:48PM

Right sorted it then.
AER: AER stands for Annual Equivalent Rate. This shows what the interest rate would be if interest was paid and added to your account annually. This allows you to compare the interest rates of savings accounts that pay interest on a monthly basis with those that pay it annually.
So I used the Gross P.A rate to work out the monthly interest (GPA/12) and the AER to work out the interest annually.
APR: The actual or real cost of borrowing in terms of interest charges and other fees, which in the UK, must be shown on all advertisements for loans.
Can't quite work out why there is such a big delta from the basic rate/headline rate and the APR, but there is (there must be some pretty big costs in there!).

A.

bunking_off · 30 October 2005 at 10:36PM

When car dealers talk about rates, they quite often mean "flat" interest rate, ie interest divided by the amount borrowed. It's a bit of a nonsense as it takes no account of the amount owing gradually decreasing during the term.

On your figures (give or take a bit, these figures might not be exact). £20k, say over 3 years. At APR 6.25%, that'd be £610/month, which means you pay a total of just over £21900 in total...ie you'd have paid just over £1900 in interest. 1900/20000 is approx 3.2%.

To attack it from another angle, using a calculator as dealers are wont to do, if they know their flat rate is 3.2% and the amount of the principal, then they can easily work out the total payable (1.032 x 20000), and hence amount per month. Working out the amount payable from an APR tends to need a spreadsheet hence is a bit beyond them - however, legally they have to provide the APR.

The distinction between APR and AER has always been something that's passed me by.

Help: AER v's APR

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