EAR vs APR UK: The Interest Rate Trap Nobody Explains
EAR (Equivalent Annual Rate) and APR (Annual Percentage Rate) are two different ways of expressing interest rates in the UK. APR is used for credit cards and loans, calculated with monthly compounding. EAR is used for overdrafts, calculated with daily compounding. The same percentage as EAR actually costs less per month than as APR—meaning a 39.9% EAR overdraft costs less than a 39.9% APR credit card.
You're comparing your debts. The overdraft says 39.9%. The credit card says 34.9%.
"Obviously, I should pay the overdraft first—it's higher."
Wrong.
That overdraft rate is EAR. The credit card is APR. Same percentages, completely different calculations.
The credit card actually costs you more per month.
This UK-specific trap catches people constantly. It affects which debt you should pay first, how much interest you'll actually pay, and whether your debt calculator is giving you correct strategy.
The Two Rate Systems
APR (Annual Percentage Rate)
Used for:
Credit cards
Personal loans
Car finance
Store cards
Mortgages (also shows APRC)
Buy now pay later (where interest applies)
How it works: APR represents the annual rate assuming monthly compounding. To get the monthly rate, you divide by 12.
Monthly rate from APR:
Monthly rate = APR ÷ 12
Example: 24% APR = 24 ÷ 12 = 2% per month
EAR (Equivalent Annual Rate)
Used for:
UK bank overdrafts
How it works: EAR represents the annual rate with daily compounding already factored in. To get the monthly rate, you need a different formula.
Monthly rate from EAR:
Monthly rate = (1 + EAR)^(1/12) - 1
Example: 24% EAR = (1.24)^(1/12) - 1 = 1.81% per month
Why EAR Looks Higher But Costs Less
Here's the counterintuitive truth:
Same percentage, different rate type = different monthly cost
| Rate | Type | Monthly Rate | Monthly Cost on £1,000 |
|---|---|---|---|
| 39.9% | APR | 3.33% | £33.25 |
| 39.9% | EAR | 2.84% | £28.38 |
The 39.9% APR costs £4.87 more per month than 39.9% EAR.
Over a year on £1,000 debt, that's nearly £60 difference—from rates that look identical.
The Real-World Trap
Let's say you're deciding which debt to pay first:
Your debts:
Overdraft: £1,500 at 39.9% EAR
Credit card: £2,500 at 34.9% APR
Wrong thinking: "39.9% > 34.9%, so the overdraft is costing me more."
Correct analysis:
| Debt | Rate | Type | Monthly % | Cost/Month |
|---|---|---|---|---|
| Overdraft | 39.9% | EAR | 2.84% | £42.60 on £1,500 |
| Credit card | 34.9% | APR | 2.91% | £72.75 on £2,500 |
Yes, the credit card costs more in total—but look at the rate. The credit card's monthly rate (2.91%) is higher than the overdraft's (2.84%) even though its headline rate is lower.
If you're using avalanche method, consider paying the credit card first.
Why Does the UK Have Two Systems?
Regulatory history.
The FCA (Financial Conduct Authority) requires different rate types for different products:
Overdrafts: Must show EAR to make comparison easier (since the 2020 pricing changes)
Credit cards and loans: Must show APR as standardised under Consumer Credit Act
The intention was transparency. The result is confusion.
Nobody tells consumers that the numbers aren't directly comparable. They just print both, side by side, as if you can evaluate them equally.
How to Compare EAR and APR
You have two options:
Option 1: Convert to Monthly Rates
APR to monthly: Divide by 12 EAR to monthly: Use formula (1 + EAR)^(1/12) - 1
Compare the monthly rates directly.
Option 2: Use a UK-Specific Calculator
A proper UK debt calculator asks which rate type each debt uses and converts automatically.
Most online calculators are American—they treat everything as APR, giving wrong results for UK overdrafts.
DebtRiot handles both correctly →
UK Overdraft Rates in 2026
Since the FCA's 2020 reforms, most UK bank overdrafts charge a single EAR rate:
| Bank | Overdraft EAR | Monthly Equivalent |
|---|---|---|
| HSBC | 39.9% | 2.84% |
| Barclays | 35.0% | 2.53% |
| Lloyds | 39.9% | 2.84% |
| NatWest | 39.49% | 2.81% |
| Santander | 39.94% | 2.84% |
| Monzo | 39% | 2.78% |
| Starling | 35% | 2.53% |
Rates as commonly advertised. Check current rates with your bank.
When Does This Actually Matter?
Matters Most: Debt Payoff Order
If you're using the avalanche method (highest interest first), you need correct monthly rate comparison to know the right order.
Matters: Comparing Products
Choosing between an overdraft and a credit card for short-term borrowing? Convert to monthly rates first.
Matters Less: Same-Type Comparison
If you're comparing two overdrafts, both show EAR—compare directly. If you're comparing two credit cards, both show APR—compare directly.
Matters Least: Snowball Method
If you're using snowball (smallest balance first), rates are ignored entirely.
Common Misconceptions
"EAR is always higher than APR"
Not exactly. EAR looks higher for the same underlying rate because it includes compounding. But that doesn't mean EAR debts always cost more than APR debts.
"Just compare the percentages"
Only works if comparing like-for-like. 35% APR credit card vs 35% EAR overdraft—the APR card costs more monthly.
"My bank's overdraft is basically the same as my credit card"
Check the maths. At 39.9% EAR vs 24.9% APR, the overdraft actually costs more per month (2.84% vs 2.08%). But at 39.9% EAR vs 34.9% APR, the credit card costs more (2.84% vs 2.91%).
The Calculation in Full
For those who want to understand the maths:
APR to Monthly
Simple division:
Monthly rate = Annual rate ÷ 1239.9% APR = 39.9 ÷ 12 = 3.33% monthly
EAR to Monthly
Compound interest reversal:
Monthly rate = (1 + Annual rate)^(1/12) - 139.9% EAR = (1 + 0.399)^(1/12) - 1 = (1.399)^0.08333 - 1 = 1.02838 - 1 = 0.02838 = 2.84% monthly
Why the Difference?
APR assumes you calculate interest monthly—12 times per year. EAR assumes you calculate interest daily—365 times per year.
Daily compounding means interest on interest accumulates faster within the year, so EAR has to express a lower equivalent monthly rate to reach the same annual amount.
Use a Calculator That Knows the Difference
Most debt calculators online are American. They treat everything as APR:
Enter 39.9% for your overdraft
Calculator applies APR formula
You get 3.33% monthly (wrong)
Your debt-free date is incorrect
Your payoff order is potentially wrong
A UK-specific calculator asks which rate type and applies the correct formula.
DebtRiot handles EAR and APR correctly →
Enter your overdrafts as EAR, credit cards as APR. Get correct monthly rates, correct payoff order, correct debt-free date.
Frequently Asked Questions
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APR (Annual Percentage Rate) uses monthly compounding and is required for credit cards and loans. EAR (Equivalent Annual Rate) accounts for daily compounding and is required for UK overdrafts. The same percentage as EAR costs less monthly than as APR.
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Not necessarily per-pound-borrowed. 39.9% EAR = 2.84% monthly. 34.9% APR = 2.91% monthly. The credit card's monthly rate is actually higher despite the lower headline number.
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FCA regulation since 2020 requires overdrafts to display EAR to make comparison between overdraft products easier. Previously, overdrafts had complex fee structures making comparison difficult.
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Convert both to monthly rates. APR monthly = APR ÷ 12. EAR monthly = (1 + EAR)^(1/12) - 1. Or use a calculator that does this automatically.
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DebtRiot is a calculation tool, not financial advice. For debt help: StepChange, National Debtline or Citizens Advice.
