How Interest Works (APR vs. AER)

Interest is the price of borrowing money. When you save, the bank pays you interest for lending it your money. When you borrow, you pay the lender interest for using theirs.

Two labels describe it. AER (Annual Equivalent Rate) shows what you earn on savings in a year. APR (Annual Percentage Rate) shows what borrowing costs you in a year, including fees.

Both AER and APR turn a deal into a single yearly percentage so you can compare options fairly. A higher AER on savings is good for you. A lower APR on borrowing is good for you.

This matters because the same product can look cheap month to month but be expensive over a year. The annual figure cuts through marketing and shows the real cost or reward.

Suppose a credit card advertises "just 2% per month". That sounds small, but compounded over a year it works out to roughly 27% APR — far more than the monthly figure suggests.

On the savings side, an account at 5% AER turns 1,000 GBP into about 1,050 GBP after a year. Comparing the AER on savings and the APR on borrowing tells you, at a glance, which direction interest is flowing and how fast.

The trap is judging a deal by its monthly rate or its headline offer. A "0% for 6 months" card can carry a high APR afterwards; a "bonus rate" savings account can drop sharply once the intro period ends.

Always check the standard APR or AER, and the date any introductory rate ends. Set a reminder for that date so a good deal does not quietly turn into a bad one.

Interest is what you earn on savings and what you pay on borrowing.

AER is the yearly figure for savings; APR is the yearly figure for borrowing.

A monthly rate hides the true yearly cost because interest compounds.

Always check the standard rate and when any introductory offer ends.

Look up the AER on your savings and the APR on any card or loan you hold, and note in your calendar the date any introductory rate ends, so a good deal never quietly turns into an expensive one without you noticing.