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AER (Annual Equivalent Rate)

The AER - Annual Equivalent Rate - is one of the main measures of interest paid on savings and investments. It shows what your annual interest would be if the interest on your account was compounded and paid annually instead of monthly (or whatever other period). All advertisements for interest-bearing savings accounts quote AER, allowing you to compare the annual rate of return you should get regardless of how often interest is credited to your account.

If an account pays interest more than once a year, for example monthly, then the AER is calculated by adding the interest each month to the account before calculating the next interest payment, and so compounding the interest over the year. Accounts where interest is paid monthly or quarterly will have a slightly higher AER than the quoted monthly or quarterly rate because of the compound interest earned on the interest paid during the year.

 

 

 

12 April, 2008
 
© 2008 K.R.Wade and Co Ltd