Banking Jargon Explained – Interest Vs APR

Personal finance can be full of confusing terms and jargon. Whether you’re applying for a credit card, loan or mortgage you might be bombarded with talk of interest and APR but what exactly is the difference? We thought we’d take a quick look at these terms to clarify exactly what they mean.

Interest

Interest is the proportion of money top of an original amount, it is either the cost of borrowing or the amount earned for saving. If you borrow money you will have to pay interest on the amount borrowed and if you save money the bank will pay you interest on the money you have saved.

Interest Rate

The Bank of England decides the interest rates which is a percentage rate that is paid on loans or savings.

The interest rates on credit (borrowing) can vary from different cards and depending on how you use it. Withdrawing money from a cash machine or using a cheque is usually the most expensive way of borrowing as interest is higher and there is often a fee for the amount you take out. This fee can also apply if you use your credit card overseas/abroad.

For example, an annual interest rate of 5% means £5 is paid in interest for every £100 saved or borrowed.

APR

Short for the Annual Percentage Rate of charge, it is the cost of borrowing money over a period of a year. The rate is applied each month that an outstanding balance is present.

APR is calculated to consider not just the interest rate but all other additional fees you have to pay such as an arrangement fee. All credit and loan products legally must show the APR so you can make an easier and fairer comparison of the different products.

Typical APR

This is the rate most borrowers will be offered if they take out a loan or other credit product. By law two thirds of all borrowers must be offered this rate.

Representative APR

This is the term you will see on most TV adverts for financial products; it is the rate that at least 51% of people who are accepted for credit will pay.

So when applying for credit be aware that this is just a guideline and you may not necessarily be offered the rate advertised.

AER

Annual Equivalent Rate refers to interest earned on savings over the course of a year when a savings or current account is in credit. Much like APR, it makes it easier to compare how much interest is paid (either monthly or annually) between different accounts.

There we have it, the difference between Interest, APR and all the variations inbetween explained. Over the coming weeks we’re going to look at more and more financial jargon to help make the world of personal finance that little bit easier to navigate.

The Noddle Team