APR vs. EAR: What's the difference?

APR is the yearly cost of borrowing, while EAR shows the real cost when compounding is included. APR is more common, but EAR gives you the complete picture if interest builds up over time. They’re both annual rates, but APR vs. EAR can provide very different numbers, and it matters when comparing loans or credit cards.

• APR, which stands for Annual Percentage Rate, doesn't include how often interest is charged — it just shows a flat yearly rate.
• EAR, which stands for Effective Annual Rate, does include compounding. It tells you what you’ll actually pay after interest stacks up during the year.

So, EAR vs. APR really comes down to how often interest is added. If interest is compounded monthly or daily, EAR will be higher than APR.

Let's examine this a bit more closely. Both APR and EAR are ways to show interest over one year, but they’re used differently depending on the situation.

APR 🇺🇸 is what you'll usually see when looking at loans, credit cards, or mortgages. Lenders are required to show it because it gives borrowers a general idea of the annual cost. It might include fees like origination charges or closing costs, but it won't show how often the interest compounds. It’s meant to help you compare basic offers.

EAR 🇺🇸 tells you what you'll actually end up paying, assuming the interest is compounded more than once a year. This matters more when interest is charged frequently, like with some credit cards or investment accounts.

This depends on what you’re doing.

If you're comparing loan offers or looking at how much a credit card will cost you, APR is usually more useful. It's simpler and what lenders are legally required to show. But if you really want to understand the true cost of borrowing (especially when interest is compounding more than once a year), you should check the effective annual rate too. That's where the APR vs. EAR difference can catch you off guard. EAR helps you see what you’ll really end up paying.

So if you're asking, should I use EAR or APR?, the answer is:

• For comparing loans and credit cards, start with APR.
• But if compounding is frequent or not clear, also check EAR — it is usually the more complete number.

There are specific situations where one works better than the other.

Use APR when:

• You're comparing mortgages, personal loans, or credit cards;
• You want to see how much a loan will cost you in a year; and
• You're reviewing offers where fees are included in the rate.

Use EAR when:

• You're comparing savings or investment returns;
• You want to know the true cost of borrowing when interest is compounded daily or monthly; and
• You're trying to see which option really gives or takes more over time.

So when someone asks when to use APR and EAR, it really comes down to context. For loans, start with APR. For actual returns or compounding interest effects, look at EAR.

A lot of different things can affect the APR you get offered, and some of them are more in your control than others. Lenders look at your credit history, but they also consider the type of loan you are getting, how risky they think you are, etc.

Here are some important factors:

• Your credit score;
• Type of loan (secured vs. unsecured);
• Loan amount and term length;
• Lender's risk policies; and
• Current market interest rates.

So, even if two people apply for the same loan, they could end up with totally different APRs.

Both APR and EAR seem like they tell you everything, but they don't always.

Depending on the lender, the APR might include some fees or none at all. EAR includes compounding, but only if you know how often it happens. Without context, these figures can look better (or worse) than they really are, so it's always worth reading everything in your agreement.

If you're carrying a credit card balance, how often the interest compounds really matters. Daily compounding can quietly increase your total cost, even if the APR looks the same. You might think you're paying 20%, but once compounding kicks in, the EAR could be much higher, and that's what you're really paying by the end of the year.

Do credit cards show APR or EAR?

Credit cards typically show APR. The actual cost you pay can be higher due to daily compounding, but they don't show you the EAR.

Why do lenders use APR instead of EAR?

APR is easier to understand and compare. It's also what regulations usually require them to show it.

Can I calculate EAR from APR?

Yes, if you have enough data, meaning, if you know how often the interest compounds. You can use a formula.

This article was written by Dawid Siuda and reviewed by Steven Wooding.