APR vs AER, when each applies
APR (Annual Percentage Rate) is the FCA-mandated way to express the cost of borrowing per year, including interest and most fees. AER (Annual Equivalent Rate) is the standardised way to express the interest you actually earn on a savings account if interest is paid and compounded over a year. Both exist to make products comparable. A credit card with a 24.9% representative APR is far more expensive than a personal loan at 7.9% APR, even if the headline monthly payment looks similar.
A £5,000 balance on a credit card at 24.9% APR, paying only the 3% minimum, takes around 20 years to clear and costs roughly £6,500 in interest. The same £5,000 over 3 years on a 7.9% APR personal loan costs about £625 in interest. On the savings side, £10,000 at 5.0% AER, compounded monthly, earns £500 in the year. At 5.0% gross (not AER) paid annually, the figure can be slightly lower depending on compounding.
Comparing a monthly interest rate to an annual one. A 2% monthly rate is roughly 27% APR after compounding, not 24%. Always insist on the APR for borrowing and the AER for saving.
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