AER and APR
What are they : Why they're important to understand
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Last update : January 2010
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- Firstly, note that AER is related to the interest rate paid on savings and it's discussed in detail below
- APR relates to borrowing money via a loan, mortgage or credit card etc - See what is APR
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| What is AER |
| AER stands for 'Annual Equivalent Rate' and it shows the rate of interest a saver will receive over a year assuming the cash is left in the account for the full year. For example - |
- Deposit £1,000 in a savings account that pays an interest rate of AER 5%
- At the end of the year the account balance would be £1,050, the extra £50 being the interest paid
- Note, the interest will normally be paid one of two ways -
- Monthly - at the end of the month the interest earned on the money gets credited to the account (usually this is a month in arrears so at the end of February the January interest will be paid), or
- Yearly - interest is paid once per year on a set date (the bank will set this out in its terms and conditions)
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| Which is better - Monthly or yearly interest |
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An account where the interest is paid monthly will receive slightly more than one where the interest is paid on an annual basis. This is because if paid monthly the interest compounds over the year.
But the difference will usually be around 0.05% which is not worth worrying about as it amounts to 50p per £1,000 in savings. However, if you have large savings in excess of £250,000 then this is a different matter as even small percentage differences can amount to several hundred pounds in extra interest over the year.
Also, people who normally use their savings to fund their retirement tend to opt for savings accounts that pay monthly interest.
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| Why AER is good news for savers - it stops any tricks |
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AER is a useful tool for savers because it stops the banks playing tricks.
This is important because history has shown that finance firms are often be sneaky with their customers and it's highlighted via Secret number 5 - Play banks at their own game - which is one of this site's 10 Secrets to Good Personal Finance.
So because the calculation for AER is standard for all the banks it's impossible to be manipulated and this makes it easy to compare 2 or more savings products offered by 2 or more different banks.
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| Summary |
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AER is good news for savers, it's simple to understand and as indicated above it makes comparing 2 different savings account extremely easy.
Finally, to find the Top 3 Savings deals see our tables which are updated every Monday.
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| See also
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Read more in the Banking & Savings section:
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