Loans Choice
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Salary advance or Pay day loans can provide a quick source of income.
Secured personal loans are sometimes called homeowner loans.
Loans for tenants with bad credit may not be a problem.
Unsecured loans are available online and from banks, building societies and supermarkets.
AER EAR APR interest rates. Full definitions.
Learn how to get the best loans with a bad credit rating.
Career development finance is available from three high street banks.
PCP car loans, (Personal Contract Purchase), HP etc.
A Marks and Spencers credit card gives you vouchers to spend in store.
Arranging debt consolidation loans in a hurry can be a mistake.
Seniors loans may be funded by equity release, but read our guide first.
What is IVA? It is an Individual Voluntary Arrangement. Find all about it here.
Interest rates on loans and mortgages can be fixed or variable rate.
AER APR EAR. What Do They Mean?
APR stands for Annual Percentage Rate.
AER stands for Annual Equivalent Rate.
EAR stands for Effective Annual Rate.
Many of the high street banks seem to have got themselves into a muddle over these terms. Firstly, the information below only applies to the UK (England, Wales, Scotland and N. Ireland) as other countries have different ideas about these things. Perhaps you have already tried typing EAR into an internet search engine and only found information about human aural sensors.
If you need a loan the only one of these terms you need to worry about is APR.
APR definition.
Banks define APR for use with secured loans, unsecured loans and credit cards.
The rate of APR quoted in your loan agreement will depend on the type of loan; whether it is a secured loan, an unsecured loan, and whether you have a good credit record or a bad credit record.
When you take out a loan, the number of repayments you must make, and the exact date they must be paid by, will be clearly stated in your loan agreement. As these details are defined precisely, the annual rate of interest over the period of the loan can be calculated exactly and must be shown on advertisements by law. All arrangement fees and any other costs must be included in the calculation. You can therefore be certain that the APR quoted is a safe and sure way to compare two or more loan quotations; the one with the lowest APR being the best value and will cost you less money.
However, you may be pressured into buying Payment Protection Insurance on the loan. This and any other optional cost is not covered in the APR calculation. As the cost of this varies from company to company, sometimes quite considerably, it still pays to shop around. Also check details like penalties for paying off the loan early as these exceptions are also not covered in APR calculations.
AER and EAR definitions.
AER and EAR are very similar terms. Banks define AER for use with savings accounts. Some banks, but not all, use EAR for calculating the interest due on overdrafts. Note that if you do a search for "EAR" on the British Bankers Association website you will find that the term EAR is hardly used at all. If your bank quotes EAR just think of it as a version of AER that has been adapted for overdrafts. For full details please see the detailed definitions of AER, APR and EAR below.
The acronym AER, meaning Annual Equivalent Rate, is used by banks for savings accounts and EAR is used for overdrafts. For the reasons given above these terms will be considered as having the same basic meaning. If you have an overdraft, the bank can ask you to repay it in full at any time and the amount you have on overdraft can vary up or down from day to day. Similarly, you can withdraw or add money to your savings account. Therefore you cannot work out in advance exactly how much interest you will be paying and what the charges will be in advance. This is the reason why an APR cannot be quoted. AER is an estimated simple interest rate that assumes interest is added* yearly in arrears but allows for the interest to be calculated at other intervals such as monthly. For the reasons given, AER is not as easy to calculate as APR because banks can choose to add interest monthly or annualy. However, the different calculations involved allow for these differences so you can still compare the quoted rates between various savings accounts. If this seems complicated, it is, because you cannot calculate in advance for unknown day-to-day cash flows that will happen in the future. Banks use different formulae to calculate the AER depending on the circumstances. The exact formulae can be seen here. Please note that this is not for the squeamish or those who have a maths phobia!!!! Banks that use EAR will calculate it in a similar manner to AER but by using a slightly different formula.
Final Hints.
Everyone is looking for a cheap loan; but a cheap loan is not necessarily the best in the long term. Choosing one with the lowest APR is a very good start but be aware that there are still costly items that can be added to a loan that is not covered in the APR or EAR calculations.
Generally a mortgage or remortgage will provide a loan with the cheapest rate, but any other secured loan should be reasonably affordable. Unsecured loans or loans to people with a bad credit history will inevitably have high rather than low rates of interest.
* Added in the sense that money is added to the amount that you owe to the bank on an overdraft or added to the amount you have on deposit with a savings account.