Financial terms explained: APR, AER and basic bank accounts
13th Sep 2015
When it comes to the world of banking and managing your money, it’s easy to be confused by some of the terms you hear. After all, there’s so much to get your head around that it can feel like you’ll never be able to understand it all – complicated jargon and long explanations when you just want to know what it means for you.
Never fear, we’re here to explain some of the phrases that can often trip people up when they’re dealing with financial matters. In this first part of the guide, we’ll help you understand the difference between APR and AER and we’ll tell you what a basic bank account is – as well as who might want to get one.
APR stands for the Annual Percentage Rate and it’s used to describe how much interest and costs you’ll pay when you borrow money. Whether you’re taking out a loan, mortgage or a credit card, or you’re buying a car on finance, you’ll be able to use the APR to see how much you’ll have to pay back in total.
This makes APR a really useful tool when you’re trying to decide which loan or credit card is for you. If you were only comparing interest rates between credit products, you wouldn’t be getting the whole picture, as this doesn’t include any extra costs you’ll have to pay. So if you were taking out a loan at 12% interest, the APR could be 14%.
As it’s the Annual Percentage Rate, it makes sense that it’s worked out as if you were borrowing for a year. If you’re taking out a short term loan for a month or so, it’s harder to use the APR to work out how much you’ll have to pay.
The APR is usually a representative rate, which means that you might not necessarily get the advertised rate. How much you’ll get offered depends on your credit history, so if you’ve had problems with borrowing in the past, you might get accepted for a higher rate than advertised.
AER is the Annual Equivalent Rate and it describes how much interest you’ll earn on a savings account. Just like APR, it’s worked out over a year – so while one savings account might pay interest every month, another might just pay it in a lump sum at the end of the year. They might have the same interest rate but as the first account will be earning interest on the interest you’ve already earned throughout the year, they’ll have different AERs.
Basic bank account
If you’ve had problems using credit in the past, you might not be able to qualify for a standard current account. Instead, you could apply for something known as a basic bank account. These are provided by many high-street banks and building societies and they offer most of the same services as traditional bank accounts – you’ll be able to receive wages, pay bills and withdraw money out of it.
One problem with many basic bank accounts is that if you accidentally spend more than you’ve got, this will take you into an unauthorised overdraft – and this can be costly! Some providers charge daily unauthorised overdraft usage fees and there can be charges for returned (bounced) payments too. You can build up two or three of these charges a day with some banks and building societies – meaning it quickly works out quite costly if you didn’t know you were being charged.
An alternative to basic bank accounts is the thinkmoney Personal Account. This is designed to help you manage your household budgeting by keeping the money you need for regular bills separate from the money you’ve got to spend on yourself. You can’t go overdrawn with the account so there’ll never be any unexpected overdraft fees. There’s a monthly management fee, to find out more about this, click here.
Check back next time to find out about some more confusing financial terms!
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