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AER Formula:
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The Annual Equivalent Rate (AER) is a standardized interest rate that shows the true annual return on savings accounts, taking into account compound interest. It allows for easy comparison between different savings products with varying compounding frequencies.
The calculator uses the AER formula:
Where:
Explanation: The formula calculates the effective annual rate by accounting for how often interest is added to your savings throughout the year.
Details: AER provides a standardized way to compare savings accounts and investments. It shows the actual return you'll earn over one year, making it easier to choose the best savings option for your needs.
Tips: Enter the nominal interest rate as a percentage (e.g., 2.5 for 2.5%) and the number of times interest compounds per year (e.g., 12 for monthly, 4 for quarterly, 1 for annual).
Q1: What's the difference between AER and APR?
A: AER is used for savings and investments to show the return you'll earn, while APR (Annual Percentage Rate) is used for loans and credit to show the total cost of borrowing.
Q2: Why is AER important for savings comparisons?
A: AER accounts for compound interest, allowing you to compare savings accounts with different compounding frequencies on an equal basis.
Q3: Does higher compounding frequency always mean higher AER?
A: Yes, for the same nominal rate, more frequent compounding results in a higher AER due to the compounding effect.
Q4: Is AER the same as the interest rate I'll actually earn?
A: Yes, AER represents the actual annual return you'll receive, assuming you don't withdraw any money and interest compounds as stated.
Q5: How does AER work with fixed-term savings?
A: AER shows the annualized return, but for fixed-term accounts, you may need to consider the total return over the entire term.