How exactly does AER work?

Question

I am planning on opening a savings account and will be putting a fraction of my monthly salary into it, around £1000 each month.

To calculate the interest generated, as the total in the account varies throughout the year, would you look at the total generated each month?

Also, at what point does the interest get generated? Is it based on the time money has spent in the account?

Possible duplicate of Does "monthly interest of 1.5% AER" mean that I will get a 1.5% interest every month? — RonJohn, Commented Jul 14, 2019 at 14:32
The first paragraph seems to be a duplicate question. The (probable, since I'm American) answers to your second paragraph are: #1 daily and credited (visible to you) monthly, and #2 yes. — RonJohn, Commented Jul 14, 2019 at 14:35
For the first paragrah, the difference is that there is money being introduced into the account each month, so at what point does the account generate the interest, and if you wanted to calculate it, would you need to first work out the monthly interest rate? — Raam Songara, Commented Jul 14, 2019 at 15:57

RonJohn · Accepted Answer · 2019-07-14 20:51:13Z

-1

If savings accounts in the UK are anything like US...

Interest is compounded daily, using the AER advertised that day.
A 365 or 360 year is used.
Interest start accruing the day it's deposited.
It's credited to your account (you can actually see it) on the account's statement date.
The AER of savings accounts can change daily, but usually don't.
Fixed-rate accounts do what they say on the tin: fix the AER on the account, and it's for a specific amount of time. Getting it out is apparently harder than getting it out of the analogous US product, the CD.

answered Jul 14, 2019 at 20:51

RonJohn

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(1) is not correct. Interest is paid using the nominal interest rate on a periodic basis, sometimes a month, sometimes daily. The AER (Annual Equivalent Rate) is typically a similar but not identical interest rate used to illustrate what the interest would have been if it were paid yearly. It used to help comparisons between different accounts.
– Andrew Ferrier
Commented Aug 8, 2020 at 11:24
@AndrewFerrier I also wrote "It's credited to your account ... on the account's statement date", which seems t be exactly what I wrote.
– RonJohn
Commented Aug 8, 2020 at 23:44
right. My point is that it is not compounded using the AER (advertised that day), but the nominal interest rate. They are similar, but not identical.
– Andrew Ferrier
Commented Aug 10, 2020 at 20:33

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