APR vs AER
Short answer
APR is the annual cost of credit, including compulsory fees. AER — annual equivalent rate — is the annual return on savings, expressed as if interest were paid and compounded once a year. APR is quoted on borrowing, AER on deposits, and they are not comparable to each other.
This answers: What is the difference between APR and AER?
Key takeaways
- APR: borrowing. AER: saving. Never compare one to the other.
- AER exists so accounts paying interest monthly, quarterly or annually can be compared on one number.
- The gross rate is what is paid before compounding; AER is what a year actually returns.
- Australia and the US use different conventions — comparison rate and APY respectively.
The one-line version
APR is a cost. AER is a return. If you see APR, someone is lending to you. If you see AER, you are lending to a bank.
What each one folds in
APR takes the interest rate on credit and adds the compulsory charges of taking it, then annualises the result. Its job is to make a rate-plus-fee offer comparable to a rate-only offer.
AER takes the interest rate on a deposit and expresses what a year actually returns if interest is left in the account to compound. Its job is to make an account paying monthly comparable to one paying annually.
AER = (1 + r ÷ n)^n − 1
An account paying 4.80% gross monthly has an AER of about 4.91%. One paying 4.90% gross annually has an AER of 4.90%. The first looks worse on the gross rate and is very slightly better on the AER — which is exactly the comparison the figure was invented to enable.
| Gross rate | Interest paid | AER |
|---|---|---|
| 4.80% | Monthly | 4.907% |
| 4.80% | Quarterly | 4.887% |
| 4.80% | Annually | 4.800% |
The APY calculator does this conversion — APY and AER are the same calculation under different names, so the tool works for both.
Gross, net and AER
Three terms appear on UK savings literature:
- Gross — the rate before any tax is deducted.
- Net — the rate after basic-rate tax, a term you will see less often since most savings interest is now paid gross.
- AER — the annualised rate including the effect of compounding.
Since interest is generally paid without tax deducted, whether you owe tax on it depends on your Personal Savings Allowance and your income tax band. Interest inside a cash ISA is not taxed.
The equivalents elsewhere
The same idea has three names across our three markets:
| Market | Savings figure | Borrowing figure |
|---|---|---|
| United Kingdom | AER | APR |
| United States | APY | APR |
| Australia | Effective annual rate | Comparison rate |
AER and APY are computed identically. The Australian comparison rate is a different animal — it applies to credit rather than savings, and is calculated on a standardised example loan.
Never compare across
A 5% APR loan and a 5% AER savings account do not cancel out, and there is no situation in which comparing them tells you anything. If you are carrying debt at 22% APR while holding savings earning 4.9% AER, the debt is costing you roughly four and a half times what the savings are earning — which is a real comparison, but it is a comparison of the underlying money, not of the two percentages.
Run the numbers
APY calculator
What is the APY on this rate?
APR calculator
What is the real APR on this loan?
Compound interest calculator
What will my savings grow to?
Sources
- BCOBS: Banking: Conduct of Business sourcebookFinancial Conduct Authority
- Savings accounts explainedMoneyHelper
Educational information only. This page explains how something works in the United Kingdom. It is not financial advice and does not take account of your circumstances. Rates, fees and eligibility change without notice — check the provider’s own terms before you act.
For free, impartial guidance, see MoneyHelper. To complain about a firm, contact the Financial Ombudsman Service.
Related guides
What Is APR? Representative APR Explained
APR is the yearly cost of borrowing including compulsory charges. In the UK, most advertised rates are 'representative' — which means fewer than half of applicants may get them.
What Is AER on a Savings Account?
AER shows what a savings account returns over a year once interest compounds. It exists so accounts paying monthly and annually can be compared honestly.