APR and AER: what each rate tells you

APR and AER are two ways of putting a single number on something that would otherwise be hard to compare. APR, the Annual Percentage Rate, is the cost of borrowing: it is a standard way of showing what credit costs you over a year, including interest and standard fees¹. AER, the Annual Equivalent Rate, is the return on saving: it shows what the interest rate on a savings account would be if interest was paid and compounded once each year³.

The two are not interchangeable and they are not rivals. One measures money going out, the other money coming in. Both are built on the same underlying interest rate, and both move when the Bank of England changes its base rate, which is set each month by the Monetary Policy Committee with the aim of keeping inflation at about 2%⁵.

What follows sets out how each measure is worked out, what it leaves out, and what happens to borrowers and savers when rates move. It also covers the figures that sit alongside APR and AER, such as APRC for mortgages and EAR for credit, because those are the ones that most often cause confusion.

APR is the cost of borrowing, AER is the return on saving

APR is defined as the total cost of your borrowing for a year, including the standard fees and the interest you will have to pay¹. It is a standard way of showing the cost of borrowing, which is what makes it useful: a loan advertised at one rate and a credit card advertised at another can be lined up against each other because both have been worked out on the same basis². Lenders have to tell you what the APR is before you sign an agreement².

AER works the other way round. It stands for Annual Equivalent Rate and illustrates what the interest rate would be if interest was paid and compounded once each year³. Because every savings provider calculates it the same way, it is the rate most often used to compare savings accounts, even where one account pays interest monthly and another pays it annually⁹.

The two measures exist because a headline interest rate on its own is misleading in both directions. On borrowing, the interest rate shows how much it costs to borrow money, expressed as a percentage and usually applying for a set period, while the APR folds in fees and other charges¹⁰. On saving, the gross interest rate does not account for compound interest, while the AER does¹¹.

Why the Bank of England base rate moves both rates

In the UK, the Bank of England sets a base rate, and each bank uses it to determine the APR range they offer¹³. The base rate is set to keep inflation on target, and changes to it can mean that savings and mortgage interest rates go up or down¹⁴. Interest rates charged by mortgage lenders are usually influenced by the base rate¹⁵.

The mechanism is blunt by design. When the central bank sets base interest rates at a high level, the cost of debt rises; when the cost of debt is high, it discourages people from borrowing and can slow consumer demand¹³. Interest rates can often rise in response to economic growth and inflation¹³. That, in turn, can have an impact on a wide range of areas including mortgages, borrowing, pensions and savings¹⁶.

The recent path has been steep in both directions. Interest rates started rising at the end of 2021 and continued increasing for over 18 months¹⁷. The Bank of England base rate, which influences the rates banks pay individuals on their savings, increased from 0.75% to 4.25% during the tax year 2022 to 2023⁷. The Bank of England raised the base rate eight times in 2022 and once more in 2023, taking it to a 4% base rate¹⁸. By November 2022 the base rate stood at 3%¹⁹. It then came down: four base rate cuts in 2025, in February, May, August and December, helped push rates down from their peak in September²⁰, and in February 2025 the Bank of England lowered the base rate from 4.75% to 4.5%²¹.

What higher interest rates mean for borrowers

For anyone borrowing, a higher base rate usually means a higher APR, and the APR is the figure that tells you how expensive the loan will be. It is generally higher than the quoted interest rate and shows the true cost of the credit²². APR is a way that lenders show the interest and additional charges you will pay on what you are borrowing²³.

How much this bites depends on the type of debt. APRs vary very widely, from single figures of 2% to 5% for mortgages, to 25% or more for some credit cards and store cards²⁴. A rise of a quarter of a percentage point is not a huge change in itself, but it applies to the whole balance²⁵.

The bigger question for most households is whether their mortgage is fixed or variable. Changes to the base rate can mean your interest rate goes up or down, but this only applies if you have a variable rate mortgage²⁶. A standard variable rate is one of those: repayments can change if the Bank of England changes the base rate²⁷. Lenders often increase their SVR in the days and weeks after a base rate rise²⁸. Some lenders run more than one variable rate; Nationwide's Base mortgage rate and Standard mortgage rate are both variable rates which could potentially be influenced by a base rate change²⁹. Saffron Building Society states that the rate of interest paid on its variable rate mortgages can change according to market conditions and changes to the Bank of England Base Rate or lenders' Standard Variable Rate³⁰. Skipton states that its LIBOR mortgages have changed to a variable rate linked to the Bank of England Base Rate plus a credit adjustment spread, and that affected borrowers were personally notified of the change and when it will take effect for them³¹.

What higher interest rates mean for savers

For savers, a higher base rate usually means a higher AER. The AER on a savings account tells you what the interest rate would be if interest was paid each year, taking into account compound interest³². It is the actual annual rate of interest, taking into account how often the interest is added to your account and the effect of compounding³³.

The compounding detail matters more than it sounds. If your bank pays and compounds interest more than once each year, the AER will be higher than the gross interest rate³⁴. That is why the two figures are printed side by side on savings statements and product pages: the gross rate is what is applied before compounding, the AER is what you actually get over a year.

Savings providers can change their rates for a range of reasons, including a change in the Bank of England base rate³⁵. That cuts both ways, and it is why a rate that looks strong today may not last. Some accounts also pay something other than interest: Sharia-compliant savings accounts pay an Expected Profit Rate instead of an annual equivalent rate of interest on savings³⁶.

Comparing rates: what APR and AER leave out

The APR is the standard way to compare loans, and generally the lower the APR, the better the deal³⁷. But it is a comparison tool, not a full description of the debt. The representative APR is the one that would be provided under at least 51% of the agreements which will be entered into as a result of the advertisement, replacing the earlier typical APR approach based on at least 66% of consumers⁶. In other words, the rate you are offered can be higher than the one advertised, and the representative APR is a threshold, not a promise.

Research for the Financial Conduct Authority found that very few participants were able to explain what APR stood for or how it worked, and most used the term APR to mean the representative APR³⁸. That gap matters, because the two are not the same thing.

There are also measures that sit between the headline rate and the APR. The Equivalent Annual Rate is the interest rate you would actually pay over a year factoring in compound interest, and it does not include separate fees and charges, unlike APR¹². For mortgages, the APRC, or Annual Percentage Rate of Change, is similar to APR but includes the annual interest rates and standard fees across the full term³⁹. The interest rate alone shows how much it costs to borrow money, expressed as a percentage and usually applying for a set period, while the APRC includes fees and any changes in rates over the entire mortgage term¹⁰.

On the savings side, the AER leaves out the things that decide whether an account suits you: how long your money is tied up, what access you have, and what happens if you need it early. AER also does not account for fees and charges for managing or accessing your savings¹¹. And where a rate is variable, the AER quoted today is not a commitment for tomorrow.

Do higher interest rates affect annuity income?

Yes. When interest rates are higher, you will typically get a better income from your annuity⁴⁰. Annuity rates reached a 16-year high in 2025⁸. The cost of borrowing money, set by the Bank of England, feeds into the rates insurers use to price annuities⁴⁰.

There is a second layer for anyone with an older pension. If your pension has a Guaranteed Annuity Rate, it could give you a higher level of income from an annuity, where the market rate is lower than the guaranteed rate on your policy⁴¹. That guarantee is a floor, so it becomes more valuable when market rates fall and less valuable when they rise.

Interest rates also affect other retirement and investment products. If interest rates rise, so will government bond yields, which pushes down prices⁴². That is worth knowing if your pension or savings are held in funds that invest in bonds, because the value can fall even as new savings rates rise.

Where to get free help

If you are trying to work out what a rate change means for your own borrowing or savings, free and impartial guidance is available. MoneyHelper provides government-backed guidance on money decisions, and Citizens Advice offers free advice on debt and borrowing. If you are struggling with repayments, Business Debtline publishes free guides on budgeting, saving and borrowing²².

For the wider picture on how rates are set and what they mean for the economy, see Bank Rate, inflation and the UK economy. If you are comparing borrowing options, loans and credit cards set out how each type of credit works. For savings, savings accounts and ISAs explain the accounts available and how interest is paid. If you are weighing up a mortgage decision, mortgages covers the types of deal and what happens when a fixed rate ends.