APR vs. EAR — What's the Difference?
By Maham Liaqat & Fiza Rafique — Updated on May 15, 2024
APR (Annual Percentage Rate) represents the yearly interest rate without compounding, while EAR (Effective Annual Rate) includes the effect of compounding within the year.
Difference Between APR and EAR
Table of Contents
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Key Differences
APR is used to determine the annual interest rate that is charged on borrowing or earned through an investment, without taking into account the effect of compounding within the year. Conversely, EAR takes compounding into account, giving a true reflection of the actual financial costs or gains over the year.
When comparing financial products like loans or savings accounts, APR provides a baseline rate of interest to expect annually. On the other hand, EAR shows how interest, when compounded at specified intervals (monthly, quarterly, etc.), can affect the total amount of interest paid or earned.
For borrowers, APR offers a straightforward view of the yearly interest rate; however, it may underestimate the total cost if the loan compounds periodically throughout the year. Whereas, EAR typically results in a higher rate than APR because it includes the impact of compound interest, offering a more accurate cost or yield expectation.
In terms of legal and advertising standards, lenders are often required to disclose the APR to present a clear, standardized benchmark for consumers comparing different loan products. Meanwhile, disclosing the EAR alongside the APR can help savers and borrowers understand how compounding affects their returns or costs.
While APR is universally used across different types of credit, EAR is particularly crucial in scenarios where compounding plays a significant role, such as with credit cards, mortgages, or high-yield savings accounts. EAR can significantly differ from APR when the compounding frequency increases.
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Comparison Chart
Definition
Annual rate charged without compounding.
Effective annual rate including compounding effects.
Focus
Nominal rate of interest.
Real rate after compounding.
Use
Comparing basic loan costs.
Accurate calculation of compound interest costs.
Legal Requirement
Often required to be disclosed by lenders.
Less commonly required, varies by product.
Impact of Compounding
Does not consider compounding.
Considers compounding, showing higher rates usually.
Compare with Definitions
Apr
The nominal interest rate for a year without compounding.
The loan has an APR of 5%.
Ear
Shows the real cost of a loan or real yield on investments.
The savings account offers an EAR of 2.75%.
Apr
Used to compare different financial products.
She chose the credit card with the lowest APR.
Ear
Reflects the increasing effect as compounding frequency increases.
The EAR increases as the compounding periods per year increase.
Apr
Excludes the effects of compounding interest.
The APR does not reflect the actual cost if there's monthly compounding.
Ear
The ear is the organ that enables hearing and, in mammals, balance. In mammals, the ear is usually described as having three parts—the outer ear, the middle ear and the inner ear.
Apr
Commonly used in advertising financial products.
Advertisements must state the APR to comply with financial regulations.
Ear
The organ of hearing and balance in humans and other vertebrates, especially the external part of this.
Apr
Standard rate across various credit types.
Whether for a mortgage or personal loan, the APR provides a base rate comparison.
Ear
The seed-bearing head or spike of a cereal plant.
Apr
Abbreviation of April
Ear
The vertebrate organ of hearing, responsible for maintaining equilibrium as well as sensing sound and divided in mammals into the external ear, the middle ear, and the inner ear.
Apr
The month following March and preceding May
Ear
The part of this organ that is externally visible.
Ear
An invertebrate organ analogous to the mammalian ear.
Ear
The sense of hearing:a sound that grates on the ear.
Ear
Sharpness or refinement of hearing:a singer with a good ear for harmony.
Ear
The ability to play a passage of music solely from hearing it:plays the piano by ear.
Ear
Responsiveness to the sounds or forms of spoken language:a writer with a good ear for dialogue; has an ear for foreign languages.
Ear
Sympathetic or favorable attention:"[The president] wavers between the two positions, depending on who last had his ear"(Joseph C. Harsch).
Ear
A flexible tuft of feathers located above the eyes of certain birds, such as owls, that functions in visual communication but not in hearing.Also called ear tuft.
Ear
A projecting handle, as on a vase or pitcher.
Ear
A small box in the upper corner of the page in a newspaper or periodical that contains a printed notice, such as promotional material or weather information.
Ear
Ears(Informal)Headphones.
Ear
The seed-bearing spike of a cereal plant, such as corn.
Ear
To form or grow ears.
Ear
(countable) The organ of hearing, consisting of the pinna, auditory canal, eardrum, malleus, incus, stapes and cochlea.
Ear
(countable) The external part of the organ of hearing, the auricle.
Ear
A police informant.
Ear
The sense of hearing; the perception of sounds; skill or good taste in listening to music.
A good ear for music
Ear
The privilege of being kindly heard; favour; attention.
Ear
That which resembles in shape or position the ear of an animal; a prominence or projection on an object, usually for support or attachment; a lug; a handle; a foot-rest or step of a spade or a similar digging tool.
The ears of a tub, skillet, or dish;
The ears of a boat are outside kneepieces near the bow.
Ear
(architecture) An acroterium.
Ear
(architecture) A crossette.
Ear
(journalism) A space to the left or right of a publication's front-page title, used for advertising, weather, etc.
Ear
(countable) The fruiting body of a grain plant.
He is in the fields, harvesting ears of corn.
Ear
Outcroppings and ridges from a baguette surface, where the uncooked dough has been scored.
Ear
(humorous) To take in with the ears; to hear.
Ear
To hold by the ears.
Ear
(intransitive) To put forth ears in growing; to form ears, as grain does.
This corn ears well.
Ear
(archaic) To plough.
Ear
The organ of hearing; the external ear.
Ear
The sense of hearing; the perception of sounds; the power of discriminating between different tones; as, a nice ear for music; - in the singular only.
Songs . . . not all ungrateful to thine ear.
Ear
That which resembles in shape or position the ear of an animal; any prominence or projection on an object, - usually one for support or attachment; a lug; a handle; as, the ears of a tub, a skillet, or dish. The ears of a boat are outside kneepieces near the bow. See Illust. of Bell.
Ear
Same as Acroterium.
Ear
Privilege of being kindly heard; favor; attention.
Dionysius . . . would give no ear to his suit.
Friends, Romans, countrymen, lend me your ears.
Ear
The spike or head of any cereal (as, wheat, rye, barley, Indian corn, etc.), containing the kernels.
First the blade, then the ear, after that the full corn in the ear.
Ear
To take in with the ears; to hear.
Ear
To put forth ears in growing; to form ears, as grain; as, this corn ears well.
Ear
To plow or till; to cultivate.
Ear
The sense organ for hearing and equilibrium
Ear
Good hearing;
He had a keen ear
A good ear for pitch
Ear
The externally visible cartilaginous structure of the external ear
Ear
Attention to what is said;
He tried to get her ear
Ear
Fruiting spike of a cereal plant especially corn
Ear
The actual interest rate after compounding is considered.
With monthly compounding, the EAR is higher than the stated APR.
Ear
Important for understanding the true financial impact.
Knowing the EAR helps evaluate if an investment is worthwhile.
Ear
Essential for comparing high-frequency compounding products.
Credit cards often have a high EAR due to daily compounding.
Common Curiosities
Can APR and EAR be the same?
APR and EAR are the same when there is no compounding within the year, such as in a simple interest loan.
Why is APR important?
APR is important as it offers a straightforward way to compare the cost of loans or credit across different products and lenders.
What is APR?
APR stands for Annual Percentage Rate, which indicates the nominal interest rate for a year without accounting for compounding.
How does EAR provide more accuracy than APR?
EAR includes the effect of compounding interest, offering a more accurate measure of the real cost of borrowing or the actual yield of an investment.
What is EAR?
EAR stands for Effective Annual Rate, which is the interest rate considering the effects of compounding during the year.
Does EAR matter for all types of credit?
EAR is particularly important in understanding costs in products where compounding occurs frequently, like in credit cards or certain types of loans.
Why do lenders have to disclose APR?
Lenders are required to disclose APR to provide transparency and allow consumers to make informed comparisons of loan costs.
Is EAR always higher than APR?
Yes, EAR is generally higher than APR because it includes the effects of compounding, which adds to the interest accrued.
What role does compounding frequency play in determining EAR?
The more frequently interest is compounded, the higher the EAR, demonstrating the greater amount of interest that accrues over the period.
Who benefits more from understanding EAR, borrowers or savers?
Both borrowers and savers benefit, as it helps borrowers understand the true cost of a loan and savers to know the actual return on their investments.
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Written by
Maham Liaqat
Co-written by
Fiza RafiqueFiza Rafique is a skilled content writer at AskDifference.com, where she meticulously refines and enhances written pieces. Drawing from her vast editorial expertise, Fiza ensures clarity, accuracy, and precision in every article. Passionate about language, she continually seeks to elevate the quality of content for readers worldwide.
