April, AER and EAR are terms used in financial advertising - What do they mean?

Have you ever scanned the acres of financial advertising and wondered what in April, AER and EAR really mean? You can always find one or the other of these terms in every advertisement for a loan or savings product. Well you're not alone.

The Financial Services Authority sets out the exact formulas for calculating April, AER and EAR. Every UK financial institution must then stick with the formulas and the FSA lays down rules about when and how the data should be disclosed. There are no exclusions! Errors always result in large fines for the offending company and compensation for any borrower or saver affected. But still no good if the public simply does not understand what the terms mean.

So, here is our part to lift the fog of misunderstanding!

April is the most frequent. It stands for "annual percentage rate" and is used to express the true cost of money borrowed on credit cards, loans and mortgages. The APR calculation takes into account the basic interest rate, when it is loaded (ie annual, monthly, weekly or daily), all initial costs and all other costs are required to pay. Like all banks calculate the same way in April, allows you to make direct comparisons between the costs of competing credit products.

So if a bank offers you a mortgage at 4.75% plus a fee of £ 450 and provision of a Building Society offers an interest rate of 5.1% with a fee of £ 100, then the figures will show in April which of the two mortgages is the most convenient.

There are two other expressions you'll see that include the term APR. X% in April means that the variable cost of borrowing is currently X% but the interest rate is not fixed and may vary (up or down).

The second is X% typical variable in April. You can regularly see this expression in loan promotions. This means that the lender can not be specific to the rate of interest that we pay as their rates vary, usually in response to your personal credit history and the amount of money you want to borrow. Therefore X% APR typical variable, is used to provide a general impression of the interest rate you can expect to be offered. The addition of the word "typical" that at least two-thirds of the applications that the advertiser is approved at that APR or less. Then, if a loan is offered, the documents will reveal the real variable APR or you will be offered in April.

Now lets turn our attention to ear. EAR is the abbreviation for "equivalent annual rate". It 'used to demonstrate the full percentage cost of debts and accounts, which may be in credit and also go into the red. The calculation accurately illustrates the cost of the mechanism discovered. In common with the APR calculation, EAR takes into account the base rate of interest charged, when the interest is charged, plus any additional charges. So, in many respects EAR and APR do the same thing - it's just that in April applies to pure lending products, while EAR applies to a product, such as a bank account, which can be held in credit or go to red.

Incidentally, the EAR and APR figures always exclude any Payment Protection Insurance you've bought to ensure that the monthly repayments will be maintained if you are off work due to accident, illness or unemployment. This is because the insurance is always optional and is never a condition of the loan.

AER on the other hand is used only in relation to savings and investments based on interest. And 'concerned with the interest rate you will receive your money. AER stands for "equivalent annual rate". It shows the adjusted rate of interest you receive at the end of a period of twelve months, taking into account the regularity of which interest is credited to the account. (This is necessary because the frequency of payment has an effect on the capitalization of interest you actually receive). The formula for AER also removes the effect of any promotional offer that disappears after a few months - a popular maneuver used by financial institutions to send their savings products to the top of lists Best Buy.

Probably forget most of this yawning as boring, but we hope to have highlighted the most important financial jargon are dealing with you! ......