The compound percentages could significantly impact the growth of an investment over time, as you will see in the example below. ![]() AER and Compound InterestĬompound interest is when interest is earned not only on the original investment but also on the interest that has been previously accumulated. Additionally, the gross interest rate isn’t the same as net interest, which is the interest rate earned after taxes and other liabilities have been removed. When looking into the gross interest rate, don’t make the mistake of believing the gross interest rate takes into account other charges that may apply. However, you will also have to pay income tax on this amount, so the actual amount you receive will be less than £1,050. In this scenario, you will earn £50 interest on every £1,000 you have saved. So, let’s say you have a savings account with a gross interest rate of 0.50%. The gross interest rate is the proportion of a loan, for example, payable before any tax is deducted. Differences Between AER and Gross Interest Rate You should also take into account the additional costs, such as charges for setting up a savings account, as well as your overall financial goals. However, keep in mind that AER is not the only factor to consider when making an investment decision. When comparing two investment products, the higher AER is usually the better choice. If you’re taking out a loan or credit card, you should also check the AER, as this will give you an idea of how much the loan will cost you in interest. It’s worth noting that AER is not for investors only. These products rely on the power of compound interest to grow over time, meaning you should opt for one that offers a high AER. It’s a useful way to compare different investments and therefore make better financial decisions.ĪER interest is particularly crucial for long-term investments, such as pensions and endowments. You can calculate the AER for any type of investment, including savings accounts, bonds, and shares. For example, if you have £1000 in savings with an AER of 0.50%, you would have earned £50 in interest at the end of the year. So, AER interest is the amount of money earned (or paid) on an investment over a year, expressed as a percentage of the original investment. The nature of AER makes it different from other interest rates such as APR (annual percentage rate), which don’t include these extras.Īdditionally, AER is always expressed as a percentage, whereas APR can be expressed as a percentage or a pound and pence figure. ![]() It’s a way of expressing the actual cost of borrowing, taking into account not only the interest rate but also any other charges that may apply. ![]() Simply put, AER stands for the annual equivalent rate.
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