It’s easy to feel overwhelmed by the amount of technical terms in the money world, ‘APR’ and ‘AER’ for example. The two get tossed around a lot together, so it’s important to know which is which.
What is APR?
APR stands for Annual Percentage Rate. It takes into account the interest rate of the product then adds on any additional charges, giving you the total cost of borrowing for the product.
APR is used for all types of credit, from mortgages to store cards, and allows you to easily compare offers and prices. Rates will differ depending on the providers, but APR is always worked out as if you were borrowing for one year.
For example, let’s say you borrowed £3,000 on a credit card with a 15% interest rate. If you didn’t pay anything back in that year it would cost you £450, as 15% of 3000 is 450.
An advertised APR is typically a ‘representative’ rate. This refers to the rate that at least 51% of applicants will get. The remaining 49% will get a different rate, depending on number of other factors such as your credit score.
What is AER?
AER, on the other hand, stands for Annual Equivalent Rate. It is classed as the interest rate for savings accounts, and allows easy comparisons to be made between providers.
For example, if you put away £200 on the 1st of January into an account with an interest rate of 1.5% AER, you would accumulate £3 in interest of the course of a year (1.5% of 200 =3).
It takes into account many factors, such as account bonuses, compounded interest and other charges, to show what you’d get if you put your money into an account and left it alone.
To learn more about compounded interest, APR and AER, check out Money Saving Expert’s guide that covers all the bases.
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