AER is expressed as a percentage and reveals how much you’ll earn in a year, after compound interest is considered.
This is necessary because an account’s gross “interest rate” doesn’t consider compound interest at all.
As such, AER will always be higher than the gross interest rate, as long as it is calculated for more than one compounding period.
AER is sometimes known as the effective annual interest rate or annual percentage yield (APY).
John attempts to compare two savings accounts:
If the AER isn’t stated, John will have to calculate the compound interest himself, which isn’t easy. The AER makes it simple for him to choose the best rate.
So for a savings account with a 5% gross interest rate that pays interest monthly…
Note: When interest is paid annually, the AER will be the same as the gross interest rate.
APR considers charges and fees, while AER doesn’t.
APR is used to calculate the total cost of mortgages and loans, because these often have huge one-off fees attached to them that should be considered by borrowers.
Savings accounts rarely have any fees attached to them, which is why AER is used instead.
In the extremely common case of a savings account having no fees attached, the AER and APR would technically be the same.
Response | |
|---|---|
| Neither confident nor unconfident | 30.49% |
| Quite unconfident | 23.24% |
| Quite confident | 19.76% |
| Very unconfident | 15.69% |
| Very confident | 10.82% |
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