How to Calculate Annual Equivalent Rate (AER) with Example
What is Annual Equivalent Rate and Annual Percentage Rate
Many people get confused with AER and APR. To start with, let’s distinguish between AER and APR. AER is related to the interest rate that is paid on savings. APR (Annual Percentage Rate) associate with borrowing money via a loan, mortgage or credit card etc. It is important to know about AER because saving is the most important aspect of our financial planning.
AER Calculation with Example
AER is the abbreviation for ‘Annual Equivalent Rate’. This is the rate of interest a saver gets annually for a fixed deposit for a year. This means if you deposit $ 500 in a savings account at AER of 5% your balance would be $525 at the end of the year. The interest of $25 is paid either yearly or at the end of each passing month. This brings us to the question, which kind of interest, monthly or yearly, is more preferable. Monthly interest earned is a little more than the amount received as annual interest, because with monthly interests the money compounds over the year. If your savings is little, the extra amount of interest, got through monthly accruals, is insignificantly little. If your savings is huge, then the amount earned through monthly interest can be large.
AER does not allow banks to play tricks with customers. This is because AER calculation cannot be manipulated.