Summary

The term APR is commonly used in financial advertising but what does APR and its lesser-used cousins AER and EAR mean? AR. This article sheds some light.

APR, AER and EAR are terms used in financial advertising. What do they mean? Part 2

Author: Michael Challiner

Now lets turn our attention to EAR. EAR is the abbreviation

for "equivalent annual rate". It's used to demonstrate the full percentage cost of overdrafts and accounts that can be in credit and also go overdrawn. The calculation accurately illustrates the cost of the overdraft facility. In common with the APR calculation, EAR takes into account of the basic rate of interest charged, when the interest is charged, plus any additional charges. So in most respects EAR and APR do the same thing - it's just that APR applies to pure lending products whilst EAR applies to a product, such as a banking current account, that can be held in credit or go overdrawn.

Incidentally, the EAR and APR figures always exclude any Payment Protection Insurance you've bought to guarantee that the monthly repayments will be maintained if you're off work due to accident, sickness or unemployment. That's because this insurance is always an optional extra and is never a condition of the lending.

AER on the other hand is only used in relation to savings and interest based investments. It's concerned with the rate of interest you'll receive on your money. ( insurance ) AER is short for "annual equivalent rate". It shows the adjusted rate of interest you'll receive at the end of a twelve-month period taking into account the regularity of which interest is credited to the account. (This is necessary as the frequency of payment has a compounding affect on the amount of interest you actually receive). The formula for AER also removes the affect of any promotional offer that disappears after a few months - a popular ploy used by financial institutions to send their savings products to the top of the Best Buy lists.

You'll probably forget most of this as it's yawningly boring but we hope [ medical insurance ] we've shed light on some of the most important financial jargon you're faced with!