Here, rates like the annual equivalent rate (AER) and the annual percentage rate (APR) can be helpful. All providers use the same method to figure these out. If you want to compare accounts, you should look at these instead of the headline rate.
Annual percentage rate (APR)
APRs are used by mortgage lenders, companies that offer personal loans and credit cards, and credit card companies to show how much it costs to borrow money. The APR includes any fees charged up front by the lender, which are spread out over the time you are borrowing the money.
The APR tells you, as a percentage of the amount you borrow, how much it will cost you to borrow money over the course of a year. So, if the APR is 9% and you borrow GBP100, you will pay GBP9 in interest and fees over the course of the first year.
There will be a headline rate and an APR on the mortgage lender's ad. Linda Nylind took the picture. In a loan ad, the lender will often give a "typical APR." This is because many lenders set the actual interest rate based on the borrower's credit history and personal circumstances. A bank must have offered its average APR (or a better rate) to at least 66% of people who might have been interested in getting a loan.
In an advertisement for a mortgage, the lender will usually list both the headline rate and the APR. Most lenders charge fees to handle mortgages, so the annual percentage rates (APRs) are usually much higher than the headline rates.
Equivalent annual rate (EAR)
When you borrow money in the form of an overdraft, the EAR is given, just like the APR. This is different from an APR in that it doesn't include fees for going overdrawn. Instead, it shows you how much it will cost you to borrow money if you stay overdrawn for a whole year.
The calculations take into account the interest rate, how often interest is charged, and what happens when interest is added to itself over the course of a year.
Annual equivalent rate (AER)
On savings accounts and checking accounts, the AER is shown when your balance is in the black. It is similar to the EAR, but it talks about interest earned instead of interest paid. The annual equivalent rate (AER) shows how much interest you will earn in a year. It takes into account how often interest is paid and what effect compounding will have.
This number lets you compare how much you will earn from a savings account that pays interest once a month to one that pays interest once a year.
AERs let you compare different accounts and figure out where your money will earn the most. Getty took the photo. The gross interest rate on an account that pays interest once a year may be higher than the gross interest rate on an account that pays interest once a month. However, when the interest is compounded, the account that pays interest once a month may give you a higher return.
For example, an account with an annual interest rate of 6.25 percent may seem more appealing than one with a monthly interest rate of 6.12 percent. However, the AER on the monthly account is 6.29 percent, while the AER on the account with annual interest payments is 6.25 percent.
The AER will take into account any fees you have to pay to get your money out. For example, if you have to pay 30 days' interest to get your money out, this will be reflected in the AER.
If a new account comes with a bonus for the first few months, you should know if this is part of the AER or not. If it isn't, you can compare it fairly to an account with a steady rate of interest all year by looking at the AER.
