Q Is it safe to say that the term APR is used only for borrowings and AER only for savings and investments? I have read that APR includes costs and charges, whereas AER does not, so perhaps they are two entirely different things, both equally applicable to borrowing and savings, or perhaps preferred for one or the other in certain contexts. I have also read on Wikipedia that the equivalent of APR for savings products is APY (annual percentage yield). I'd be grateful if you could sort these acronyms out for me.
SW
A APR (annual percentage rate) is the annual rate of interest payable on mortgages, loans, credit cards and other credit products. It is generally used to allow borrowers to compare different credit offers because it not only includes the relevant interest rate, but also any charges involved, such as arrangement fees. This means, for example, a mortgage with an interest rate of 5% could have an APR of 5.5% once the other costs are taken into account.
AER (annual equivalent rate, although sometimes known as the annual effective rate) is usually used in savings accounts. It explains what rate of interest you will earn depending on how often interest is added to your account.
For example, an account that accumulates interest monthly will have a lower interest rate than one that pays annually because the monthly account will benefit from compound interest more quickly. However, they might both have the same AER.
In this way, AER allows comparison between savings accounts that pay interest at different intervals in the same way that APR allows comparison between loans with different interest rates and charges. AER doesn't include costs and charges simply because there generally aren't any associated with savings accounts.
Because of this lack of fees, savings accounts often quote their interest rate as APR. For example, a savings account that pays 5% interest a year also has an APR of 5% - this is the interest rate plus any fees/charges (none) that need to be included. It also has an AER of 5%, because interest is paid annually.
APY, meanwhile, is an American term and not used for savings accounts in the UK, though it is basically the same thing as AER as it takes into account the effect of compounding interest.
