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APR and AER
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These are important terms to understand when comparing different loans, credit cards and savings accounts. APR stands for Annual Percentage Rate and, when it comes to borrowing, it shows you, essentially, how much your loan will cost you per year including any charges. For savings it is the rate that is normally quoted showing how much you should make each year on your savings. AER, which is quoted more often than it used to be, stands for Annual Equivalent Rate and it’s used in descriptions of savings accounts and how much you can make on them. Really it shows what the interest rate would be if the interest were paid annually instead of monthly or quarterly. Sometimes the AER is different from the APR because, say, the bank has a six-month introductory offer (to get themselves into the 'best-buy' tables). That might be 7% for the first six months then 5% after that. This means that they can say they have a 7% APR but, as they have to be honest about it now, they have to admit that over the whole of the first year, the Annual Equivalent Rate (taking an average) is actually 6% (7% for six months then 5% for another six months). Remember to look at the APR or AER for each product you are comparing (whether it's saving or borrowing) rather than getting confused by other figures that may be advertised, such as the monthly interest rate. This way you can compare all products on the same basis and work out how much they would cost you or earn you over the same amount of time.
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Jasmine & the Moneymagpie team
Moneymagpie Moneypedia
21.04.2008
