There are some financial terms that you should understand. They are important and can help you look at financial products to get the best deal for you.

There are three terms that can cause confusion, they are never really explained, and it is assumed that you understand the terms if you are looking for a certain financial product.

Understanding APR

APR means Annual Percentage Rate. This is the term that you will find is the most common, but it is not always the right one to decide if a product is right for you.

The APR shows the true cost of a loan or financial product that you are looking at. This figure should be higher than the interest rate, because it should include any fees or services that need to be taken into consideration.

But this financial term doesn’t take into consideration the amount of compound interest that can occur over the course of time. This won’t give you the accurate picture that you should be looking for.

Understanding APY

The APY means the Annual Percentage Yield. This looks at the long term rate and includes any compound interest, too.  In investing, or saving, it will tell you the rate that includes the compound interest. This highlights the usefulness of the product. It is especially interesting to see when you are looking into borrowing; it shows the long term projected costs of the loan.

This is the rate that you should pay particular attention to with borrowing, including loans and credit cards.

Understanding EAR

This is the most important rate if you are poor with budgeting and frequently go overdrawn. EAR means the Equivalent Annual Rate. This is the rate that the banks use to work out how much you owe them, when you go overdrawn in your account.

But it is also a great financial term to use when you are considering a financial product. It will tell you the actual figures of how much you are paying in interest and payments including the compounding of interest.

So, which one to choose for which job; a great way is to look at them all, know what they mean to you. If you don’t understand the percentage ask the person selling the financial product to explain. If they themselves understand the term they will be able to explain what it means. If the sales person isn’t sure then walk away, if they don’t know the terms and what they mean, how are they to know the products that they are selling are the right ones for their customers.

Financial Information

It is vital that you are fully aware of the terms and conditions of any financial agreement that you are signing. If you are signing without being fully aware of the products that you are signing for, then there could be a problem with the product not being suitable and meeting your needs.

You need to understand any financial decision that you make, otherwise it could cost you in the long term on payments that are high, and interest rates that are not competitive.