COMMENT
Know Your AERs

A report published earlier this week revealed that a rather high number of people don't know the meaning of 'AER' as an interest rate for savings. It's not surprising really, considering how much the industry loves confusing people with financial jargon.

AA Savings reported that more than three-quarters of the savers they surveyed didn't know what it stood for or what it meant. It actually stands for Annual Equivalent Rate, although even that is meaningless unless you understand the terminology.

The AER shows what the notional interest rate would be if the interest was compounded and paid annually, instead of monthly or quarterly. So, for example, if the bank pays you interest every month, it's the difference between you taking the interest out of the account each month or leaving it in there to build up over the year, in which case you'd earn extra interest on your interest as each month goes by.

Where people often get confused is when introductory rates are different to the quoted AER.

For example, if you look in our Savings Centre, you'll see that Egg is currently offering a bonus savings rate of 5.5% for the first six months after which they guarantee to match or better the Bank of England base rate (currently 4.75%). The higher rate of interest is paid until the end of the six-month introductory period and the standard rate applies from that point forwards. Thereafter, the standard rate is paid annually.

So, add both figures together and divide by two (for two six-month periods) and you'll see that you get the quoted AER of 5.12%.

So, while Egg can highlight its headline rate of 5.5%, it also has to tell you what the interest rate would be if you kept your money with it for the full year.

More: Earn more interest in our Savings Centre.