APR vs EAR (AER): What’s the Real Cost?
Financial products quote different types of “rates” — APR, EAR, or AER — depending on whether they’re loans, credit cards, or savings. Understanding how they differ is key to comparing real costs and returns.
1. What Is APR?
APR (Annual Percentage Rate) represents the yearly cost of borrowing, including both interest and any compulsory fees. It’s designed to help you compare loans and credit cards on a like-for-like basis.
For example, a loan charging 5.0% interest with a £200 fee over five years might have an APR of ~5.4%. APR is therefore a “total cost of credit” figure — not just the nominal interest rate.
- Used for: loans, mortgages, credit cards
- Includes: interest + mandatory fees
- Ignores: compounding frequency (assumes simple annualisation)
2. What Is EAR (or AER)?
EAR (Effective Annual Rate) — or AER (Annual Equivalent Rate) for savings — represents the true yearly rate after taking compounding into account.
If a 12% nominal rate compounds monthly, each month adds 1%, and the total effective return after compounding is actually 12.68%. That’s the EAR.
- Used for: savings, overdrafts, variable credit
- Includes: compounding effect
- Excludes: one-off or arrangement fees
| Rate Type | Used For | Includes Fees? | Compounding? |
|---|---|---|---|
| APR | Loans, credit cards, mortgages | Yes | No |
| EAR / AER | Overdrafts, savings, variable rates | No | Yes |
3. Why the Difference Matters
APR helps you compare borrowing costs across products with fees. EAR or AER shows the true return or effective cost after compounding. When comparing loans, use APR. When comparing savings or variable rates, use EAR/AER.
Example:
- Loan A: 5% nominal, no fees → APR ≈ 5%
- Loan B: 4.7% nominal + £500 fee → APR ≈ 5.3%
- Savings Account: 5% nominal, monthly compounding → EAR = 5.12%
Even though the nominal rate is the same, compounding and fees make a measurable difference to what you actually pay or earn.
4. The Maths Behind It
The formula for converting between nominal and effective rates is:
EAR = (1 + r/m)m − 1
where:
- r = nominal annual rate (as a decimal)
- m = compounding periods per year (12 for monthly, 4 for quarterly)
To go the other way:
Nominal = m × ((1 + EAR)1/m − 1)
Try this yourself using the APR ↔ EAR Calculator.
5. Key Takeaways
- APR includes fees — for loans.
- EAR/AER includes compounding — for savings.
- Nominal rates can be misleading without knowing compounding frequency.
- Always compare like-for-like when choosing between products.