What is the difference between APR and EAR?

An APR, or annual percentage rate, is a nominal interest rate required to be disclosed by lenders and may include fees in addition to interest but excludes any compounding. It is a common standard for lending companies to provide a rate to borrowers for a loan, such as a car loan, mortgage, business loan or personal loan.

The EAR, or Effective Annual Rate, provides you with the actual interest you will pay on a loan when the lender discloses both the APR and the compounding period. If no compounding period is provided, then the rate is compounded annually so the EAR and APR are the same. Most lenders lend at a rate with a compounding period more frequently than one year, they are:

Compounding Frequency / Periods per Year

  • Semi-annual 2

  • Quarterly 4

  • Monthly 12

  • Weekly 52

  • Daily 365

  • Continuously ∞

When an APR is compounded at any one of these time periods, the EAR will be higher than the APR. As Einstein supposedly said:

“Compound interest is the eighth wonder of the world. Those who understand it, earn it. Those who don’t, pay it.”

Financial formula for compound interest, showing EAR calculation as (1 + APR/n)^n - 1.

The formula for converting an APR to EAR is:

Most credit card companies charge not only a high rate when you carry a balance, they also typically compound at a daily rate. A 24.99% APR on your credit card has an EAR of 28.38% when compounded daily.

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