Posted in Finance
Comments Post a Comment

Interest Rates: APR & AER Explained

Interest rates are definitely not the most exciting topic that you could be reading about, however, they are key to helping you better understand and manage your household finances.  Most families will have some form of borrowing and aspirations to save, so lets delve in to exactly what APR’s and AER’s are and how they can help you out.

 

What is the difference between at APR & an AER?

APR (borrowing) = Annual percentage Rate is the official rate used for any borrowing.  It includes the cost to borrow money and also any associated fees.

AER (saving) = Annual Equivalent Rate is the official rate used for savings accounts.

These rates are great to use if you want to compare loans, credit cards or savings from different providers, just remember to compare like with like.

 

APR in more detail

APR = Annual Percentage Rate

An APR is the annual percentage rate charged for a finance product such as a loan or credit card. It is a compound interest rate which is essentially the way lenders communicate how much it will cost for you to borrow money each year.

An APR not only takes in to account the interest you’ll be charged but also any fees as well, such as an annual fee or an arrangement fee.

The idea behind an APR is to stop lenders from quoting a very low interest rate and then charging you a host of hidden fees.

Why are APR’s so useful?

All lenders publish an APR, which is the total cost per year to borrow money, including any fees.  An APR can then be used to compare products from different lenders, without having to worry whether all of the fees have been included or not.

Therefore, if you are going to borrow money, make sure you look at the APR.

 

Example: Credit Card APR’s

  • Credit cards are typically an expensive way of borrowing
  • A credit card will usually advertise a purchase APR and a representative APR
  • You need to look at the representative APR when comparing credit cards

Take a look at the example below, to see the effect of an annual fee on the representative APR.

  Credit Card 1 Credit Card 2
Purchase APR 21.9% 18.9%
Annual Fee £0 £195
Representative APR 21.9% 59.3%
Source:HSBC    

 

 

Be Aware

  1. A “representative” APR is the typical rate that a lender will lend at, however, this rate must be offered to 51% of people for it to be representative. To find out your actual rate you will need to complete a formal credit application, but the representative APR will give you a good idea of the starting rate a lender is likely to charge.

 

  1. Fees included are only the compulsory ones. For example, you might be given the option to purchase payment insurance for a personal loan. This is in addition to the cost of the loan and hence will increase the initially quoted APR.

 

 

 

 

AER in more detail

APR = Annual Equivalent Rate

An AER is the annual percentage rate you will receive if you leave your money invested for a year. However, an AER is gross of any tax you may have to pay.

Why are AER’s so useful?

As with an APR, an AER gives you the ability to compare savings products between different providers so you know exactly how much you will receive in interest, if you leave your money invested for a year.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *

Scroll to top