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AER Formula:
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The Annual Equivalent Rate (AER) is a standardized way of expressing interest rates on savings accounts in the UK. It shows what the interest rate would be if interest was paid and compounded once each year, allowing for easy comparison between different savings products.
The calculator uses the AER formula:
Where:
Explanation: The formula accounts for the effect of compounding by showing the effective annual interest rate when interest is compounded multiple times throughout the year.
Details: AER provides a standardized measure that allows consumers to compare different savings accounts on a like-for-like basis, regardless of how frequently interest is paid. It's particularly important when comparing accounts with different compounding frequencies.
Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%) and the number of compounding periods per year as an integer. All values must be valid (r ≥ 0, n ≥ 1).
Q1: Why is AER important for UK savers?
A: AER allows for easy comparison between different savings accounts by showing the effective annual rate regardless of how often interest is paid or compounded.
Q2: What's the difference between AER and APR?
A: AER is used for savings accounts to show the effective interest earned, while APR (Annual Percentage Rate) is used for loans and credit to show the effective interest charged.
Q3: How does compounding frequency affect AER?
A: The more frequently interest is compounded, the higher the AER will be compared to the nominal rate, as interest is earned on previously earned interest.
Q4: Is AER the same as the actual return I'll get?
A: Yes, AER represents the actual annual return you can expect, assuming you don't withdraw any money and interest rates don't change.
Q5: Do all UK savings providers use AER?
A: Yes, UK regulations require all savings providers to quote AER to ensure transparency and allow for easy comparison between different savings products.