Divide the ‘i’ (the interest rate) by the ‘n’ (the number of times interest will be paid).Use the number of times interest will be paid in a year as the ‘n’.Take the gross interest rate for the year and make this the ‘i’ in the formula.

You can break down the formula into these simple steps to see how AER is calculated: ‘i’ represents the annual interest rate as a decimal, while ‘n’ is the number of times the interest is paid throughout one year.ĭon’t worry if you’re confused. The formula for AER is AER = (1 + i/n)^n − 1. You don’t need to work out the AER interest, but understanding the formula used to calculate AER can be useful. Shawbrook and other banks will provide the AER on savings accounts. Both are expressed as percentage figures. To put it simply, APR is usually used to refer to what you pay back, while AER is the interest you will be paid. APR is the total annual cost of borrowing money and is usually associated with products such as personal loans, mortgages, and credit cards.AER is used for savings accounts to illustrate the interest you’ll earn.What’s the difference between AER and APR? The higher the AER, the greater the return. If two accounts have the same gross rate but have different AERs, the account with the higher AER will pay more interest. They don’t consider how much you would make by keeping your savings in the account for a longer period. This means that if a bonus is an introductory offer and lasts less than one year, the rate does not show what happens when this ends. Gross rates include bonuses, but they only show what you would earn at the outset. The interest earned the next month will be based on your new balance, not your original deposit. For example, if you’re paid interest monthly, your account balance will increase each month. Compound interest is when you earn additional interest on previously earned interest. The gross interest rate is a flat rate of interest that doesn’t take compound interest into consideration. AER shows how much you’ll earn over a whole year. The gross rate, or gross interest rate, is the rate you’ll get when you first open a savings account. This is the interest rate paid on your account. The gross rate is the interest rate without the deduction of income tax. What’s the difference between AER and gross interest rate? With AER, you’ll see how much you’ll earn from each account if open for twelve months and can compare yearly interest rates regardless of the account’s term or type. And because of this, it’s simple to compare different savings accounts. monthly or yearly) and includes bonuses, compound interest, and any account charges made for allowing early withdrawal of money.Īs AER considers these elements, it gives an accurate view of the interest you’ll earn. The AER calculation considers how often you’ll be paid interest (i.e. In this guide, we’ll explain everything you need to know about AER - what it is, how it differs from gross interest and APR (annual percentage rate), and how interest is calculated.ĪER is the interest rate that shows how much you’ll earn in interest over an entire year. EAR and APY are similar but are not the same.Īs we like to keep things simple, we want all our savers to understand the interest rates we offer. You may see other providers describe their interest rates as Effective Annual Rate (EAR) or Annual Percentage Yield (APY). At Shawbrook, we’ll always let you know a savings account’s AER.

Aer meaning