What is AER and how does it work?

AER stands for Annual Equivalent Rate. You may also see an interest rate listed as an Effective Annual Rate (EAR) or Annual Percentage Yield (APY), which are similar ways of calculating interest, but that are used in different contexts.

The AER is sometimes confused with the gross rate. The gross interest rate, or gross rate, shows the actual or ‘effective’ annual rate of interest on a savings account over each year. Although the gross rate may sound similar to the AER, the gross rate reflects the contractual rate, meaning that it takes into account any contractual terms and conditions that could affect the rate of interest you could earn in a year, including any compounding.

The gross rate may be higher or lower than the AER, but the AER makes it easier to compare savings accounts.

You may also see the terms ‘simple gross rate‘ or ‘gross simple‘. These terms mean that the interest rate doesn’t include compounding.

How often interest is compounded depends upon the bank offering the savings account. You may see a savings account advertising that ‘interest is calculated daily, compounded annually and available on maturity’. This means the bank is checking your balance and accruing interest daily, but it is paying you that interest once a year and making the whole sum available to you at the end of the fixed term.

Regardless of how frequently interest is compounded, the AER always illustrates what you could earn within a year if interest is compounded annually.

The AER formula is quite complicated, which is why we do the calculations for you to show how much you’ll earn from any savings account on our marketplace. If you want to do the maths yourself, it’s easiest to start with a one year fixed term deposit account which pays interest annually, as all you need to do is multiply your deposit amount by the AER.

The following equation shows how much you would earn when your one year fixed term deposit of €10,000 with a 1.65% AER matures:

€10,000.00 x 1.65% = €165.00

€10,000.00 + €165.00 = €10,165.00

Working out how much you’ll earn from term deposit accounts with terms other than one year, or if interest isn’t paid annually, is a little more complicated. You can use the following five steps to work it out yourself:

1. Start by finding out the gross interest rate
2. Divide the gross interest rate by how many times interest will be paid in a year
3. Add one
4. Multiply the result by how many times interest will be paid in a year
5. Subtract one

You can use this method to work out how much interest you’ll earn from 2 year fixed term deposits, 3 year fixed term deposits and fixed term deposits with other terms, but at raisin.ie, we do the maths for you so you can see how much you could earn from a savings account before you apply.

AER variable means that your savings account provider can change the interest rate of your savings account. A savings account provider should advertise how much notice they’ll give you of a rate change. If the rate is variable, it means that it could increase or decrease.

The annual equivalent rate (AER) is designed to make comparing savings accounts easier, and the APR is designed to make it easier to compare loans and credit cards. Put simply, AER is for saving AND APR is for borrowing.