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AER Formula:
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AER (Annual Equivalent Rate) is the interest rate for savings accounts that shows what the interest rate would be if interest was paid and compounded once each year. It helps compare different savings accounts on a like-for-like basis.
The calculator uses the AER formula:
Where:
Explanation: The formula accounts for the effect of compounding by calculating what the effective annual rate would be if all interest was compounded annually.
Details: AER is crucial for comparing savings accounts because it standardizes the interest rates regardless of how frequently interest is paid. It gives a true picture of the return on your savings over one year.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%), and the number of compounding periods per year (e.g., 12 for monthly, 4 for quarterly, 1 for annual). All values must be valid (r > 0, n ≥ 1).
Q1: What's the difference between AER and APR?
A: AER is used for savings accounts to show the effect of compounding, while APR is used for loans and credit cards to show the total cost of borrowing including fees.
Q2: Is a higher AER always better?
A: Generally yes, as it means your savings will grow faster. However, also consider factors like account accessibility, fees, and minimum balance requirements.
Q3: How often is AER typically paid?
A: AER is an annualized rate, but interest can be paid monthly, quarterly, or annually depending on the account terms.
Q4: Does AER include compound interest?
A: Yes, AER specifically accounts for the effect of compound interest, showing what the annual rate would be if all interest was compounded once per year.
Q5: Is AER the same as the gross rate?
A: No, the gross rate is the rate before tax, while AER shows the effect of compounding. AER is usually higher than the gross rate when interest is compounded more than once per year.