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I found references relative to US where the Nominal Annual Percentage Rate or simply APR is defined as the simple interest rate (i.e. proportional to time and without compounding).

Instead the effective APR or Annual Percentage Yield (APY) takes into account the effect of interest compounding. Also in US there are some legal provisions requiring that APR (and not the APY) to be advertised.

But how is the situation on the UK side? Are the meanings the same? APR=simple, APY=compound too?

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1 Answer 1

First off, APR can be both, compounded or not compounded, depending on whether you talk about nominal APR or effective APR. Though, generally in the US when people talk APR it is referring to the nominal APR. Also, APY is not a generally used term in the US, usually EAR is used which is taking into account compounding in order to make rates comparable across different compounding frequencies.

In the UK the situation is very similar with the following exception:

  • EAR is the rate, taking into account compounding, on interest owed
  • AER is the rate, taking into account compounding, on balances earned
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