What is AER?

In simple terms, AER shows how much interest you’ll earn if you keep your money in a savings account for a full year.

All banks and building societies show their interest rate as AER, which can help you:

Compare products, such as savings accounts and ISAs
Understand the amount of interest you could earn over a year before any tax deductions

Shown as a percentage, AER also factors in compound interest, which is any interest you earn on top of interest you’ve already been paid. Although, it doesn’t account for any fees or charges.

What does AER stand for?

AER stands for annual equivalent rate.

How does AER work?

AER works differently depending on how often your account earns interest. It can be compounded daily, monthly, quarterly, annually, or for any other periods.

Typically, the more it compounds, the more interest you could earn. But this also depends on what the interest rate is, how much you save, and how long you leave it untouched.

If you withdraw money at any point, it will affect your potential interest earnings.

Fixed vs variable AER

There are 2 types of AER: fixed and variable. The difference between these 2 rates comes down to how stable they are.

Fixed AER

The interest rate stays the same for a set period. For example, if your AER was fixed at 7% for 2 years, it wouldn’t change during that time.
Variable AER

This is where the interest on your account can go up or down based on market conditions or the Bank of England’s base rate.

While the AER is helpful for making quick comparisons, it’s important to make sure the account is suitable for your needs. For example, consider whether you need regular access to your funds or can afford to leave it untouched.

Explore: ISAs or savings accounts

Difference between AER and gross interest

Gross interest is the annual rate of interest you’ll earn on your savings before any tax is deducted.

Unlike AER, gross interest doesn’t account for compound interest. So, if you’re comparing accounts, AER is more likely to offer you a better idea of the potential growth of your savings over time.

AER vs APR

AER tells you about the earnings on your savings, while APR (Annual Percentage Rate) is used to describe the cost of borrowing for things like loans and credit cards. APR includes the total interest, fees and charges when borrowing money.

If you want to save your money, then just stick with AER for now. If you want to borrow money, then check that product’s APR.