APR to EAR Converter

APR vs EAR: What You Need to Know

When comparing loans, credit cards, or savings accounts, understanding the difference between APR (Annual Percentage Rate) and EAR (Effective Annual Rate) is crucial. These two rates can differ significantly, and using the wrong one for comparison can cost you thousands of dollars.

What is APR?

APR (Annual Percentage Rate) is the simple annual interest rate without accounting for compounding within the year. It's the rate lenders are required to advertise by law. While useful for basic comparisons, APR doesn't tell the full story.

What is EAR?

EAR (Effective Annual Rate), also called APY (Annual Percentage Yield) for savings accounts, accounts for compounding interest. It represents the true annual cost of a loan or true annual yield of an investment. When interest compounds (daily, monthly, quarterly), EAR is always higher than APR.

The Formula

EAR = (1 + APR/n)^n - 1

Where n = number of compounding periods per year

Examples

12% APR with Different Compounding

• Annual compounding: 12.00% EAR
• Semi-annual: 12.36% EAR
• Quarterly: 12.55% EAR
• Monthly: 12.68% EAR
• Daily: 12.75% EAR

Notice how daily compounding adds 0.75% to the true annual rate!

Credit Card Example

Credit card advertises 18% APR with daily compounding:

• APR: 18.00%
• EAR: 19.72%
• Difference: 1.72% (nearly 2% higher!)

On $5,000 balance, this means $86 more in annual interest than the APR suggests.

Why This Matters

For Borrowers

• Credit Cards: 18% APR sounds okay, but 19.72% EAR is the true cost
• Mortgages: Small EAR differences mean thousands over 30 years
• Personal Loans: Compare EAR between lenders, not just APR
• Auto Loans: Dealer financing often has daily compounding, increasing true cost

For Savers/Investors

• Savings Accounts: Look for APY (same as EAR), not just APR
• CDs: Daily compounding beats monthly at same APR
• Money Market Accounts: Higher APY means better returns

Real-World Scenarios

Scenario 1: Comparing Credit Cards

Card A: 17.99% APR, monthly compounding = 19.56% EAR

Card B: 18.25% APR, annual compounding = 18.25% EAR

Card B is actually cheaper despite higher APR!

Scenario 2: Choosing a Savings Account

Bank A: 4.50% APR, monthly compounding = 4.59% APY

Bank B: 4.45% APR, daily compounding = 4.55% APY

Bank A provides better returns despite lower compounding frequency.

Compounding Frequency Impact

At 10% APR:

• Annual: 10.00% EAR (baseline)
• Semi-annual: 10.25% EAR (+0.25%)
• Quarterly: 10.38% EAR (+0.38%)
• Monthly: 10.47% EAR (+0.47%)
• Daily: 10.52% EAR (+0.52%)

On $100,000 loan, daily vs annual compounding costs $520 more per year.

Common Mistakes

1. Comparing APR to APR: Ignores compounding differences
2. Assuming APR = actual cost: Underestimates true expense
3. Not asking about compounding: Lenders emphasize low APR, hide high EAR
4. Focusing only on rate: Also consider fees, penalties, terms

Tips for Consumers

When Borrowing

• Always calculate EAR before comparing loans
• Ask lenders for APY/EAR, not just APR
• Prefer less frequent compounding when borrowing
• Read fine print about compounding frequency
• Factor in fees – they increase effective rate further

When Saving/Investing

• Look for APY (Annual Percentage Yield = EAR)
• Prefer more frequent compounding
• Daily compounding is best for savers
• Don't be fooled by high APR with poor compounding
• Reinvest all earnings to maximize compounding benefits

Legal Requirements

Truth in Lending Act (TILA) requires lenders to disclose APR, making it easy to compare loans. However, for savings accounts, institutions must disclose APY (EAR). This inconsistency can confuse consumers, so always know which rate you're looking at.

Quick Reference

For Loans (you're paying):

• Lower EAR is better
• Prefer less frequent compounding
• Ask about EAR, not just APR

For Savings (you're earning):

• Higher APY/EAR is better
• Prefer more frequent compounding
• Daily compounding maximizes returns