Borrowing and credit
What is EAR?
Acronym: EAR
Quick definition: EAR is an annualised rate used to show the cost of overdraft borrowing when interest is compounded over a year.
At a glance
- EAR stands for Equivalent Annual Rate.
- It is commonly used for overdrafts.
- It shows the effect of compounding interest over a year.
- It should not be confused with APR or savings AER.
Explain it simply
EAR is a way to show the yearly cost of an overdraft. It includes the effect of interest being charged on interest if the overdraft stayed in use for a year. This helps people compare overdraft costs. It is not the same as APR, which is often used for loans and credit cards. If you use an overdraft only for a short time, the actual cost depends on how much you borrow and how long you stay overdrawn.
Student explanation
Equivalent Annual Rate is used mainly to explain overdraft interest. Because overdrafts can be used flexibly and interest can compound, EAR gives an annualised measure of the rate if the borrowing remained outstanding for a year. Students should know that EAR does not mean the customer will definitely pay that amount; the actual cost depends on the daily overdrawn balance and duration. It is useful when comparing arranged overdrafts but should not be mixed up with APR for loans or AER for savings.
Professional explanation
Equivalent Annual Rate is an effective annual rate used to express overdraft interest cost after compounding. It enables customers to compare overdraft pricing on a consistent annual basis, even where interest is calculated daily or monthly. EAR disclosure interacts with current account information, overdraft alerts, eligibility tools and cost calculators. It does not usually include every possible account fee unless required by the relevant disclosure context, and it should not be presented as equivalent to APR. Accurate explanation is important because customers may see EAR as abstract when overdraft use is short-term and variable.
UK example
A bank shows the EAR for an arranged overdraft so a customer can compare the rate with another current account's overdraft pricing.
Why it matters
EAR helps explain overdraft costs, which can otherwise be hard to compare because overdraft balances change daily.
Common misunderstanding
EAR is not the same as APR, and it does not mean a customer pays a full year's interest after using an overdraft for only a few days.