APR & AER- Interest Rates for Borrowing and Savings

When you are borrowing, there is something called an APR, or annual percentage rate that is calculated into the amount that you borrow. This APR is calculated by how much you borrow, and also takes into consideration and other related fees and automatically includes them. This all corresponds to give you a calculated cost of debt.

The APR can be a tricky thing. This rate includes compulsory charges. When getting a new loan, many lenders will include payment protection insurance without even informing you. Be aware and ask about this at the time of receiving your new loan. Also, the APR is intended to specify the amount that you will be paying each year over the entire term of your debt. Even though this is put into place, the rates of an APR can still change, making it very difficult to understand.

When using your saving account, there is an AER or Annual Equivalent Rate that is put into place. This AER is intended to make it easy for you to compare its rates in regards to other accounts.

Understanding the concept of Compound Interest is important when it comes to your savings. This is the process of taking your principal, and adding your accumulated interest to that amount. In other words, you will be earning interest not only on the original deposit that you make into your savings accounts, but you will also earn interest on the interest that the bank is paying you. The longer you leave your money in a savings account, the more this compound interest will have a beneficial effect on your savings.

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Filed under Bank Saving, Money Saving |