Gross vs. AER interest: What’s the difference for your savings?
Understanding how interest works is important when deciding where to put your savings. In this article, we explore the differences between gross and AER interest, so you can make the best choice for your financial future.
This article is not advice. If you would like to receive advice on your savings and investments, consider speaking to a Financial Adviser.
Interest can either cost or benefit you, depending on whether you’re paying it on credit or earning it on a bank deposit.
This article explains what gross interest and AER (Annual Equivalent Rate) mean in banking, and shows you how to convert gross interest to AER to help you find the best rates.
Gross vs. AER
Gross interest and AER are two ways of expressing interest rates, helping you understand how much you’ll earn when you save money.
What is gross interest?
Gross interest is the total you’d earn on a deposit before any deductions, such as tax. It's shown as a percentage. You earn gross interest when you first open a savings account.
Gross interest can also apply to the amount you owe on outstanding credit.
What is AER?
AER shows how much you’ll gain in interest over a year, including the effects of compound interest. It’s especially useful for comparing rates when payment periods vary (e.g. monthly, quarterly).
AER calculates your interest as if you were paid all at once, annually, as a lump sum. This is why it’s called the ‘Annual Equivalent Rate’.
Variable AER
Some accounts offer variable rates, which means that the AER you earn can change. This is usually in response to economic conditions. It's important to consider variable rates when comparing savings options.
Fixed Rate accounts offer a set interest rate for an agreed period, so your AER remains the same throughout that time.
Why do banks offer AER?
Banks offer AER interest to encourage you to save with them. They then use your deposits to lend money to customers through loans and credit, earning interest from those products.
Banks pay AER on savings, which is a cost for them. They try to keep these rates low to maximise their profitability. But if rates are too low, people will likely invest their money elsewhere.
To get the best rate, it’s always worth comparing a range of accounts from different providers.
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What terms and conditions affect AER?
Whether or not you earn the advertised AER can depend on the type of account you open, and the terms you agree to. There are two notable examples of this.
Notice savings accounts
With a notice savings account, you’ll need to tell your bank or building society of any upcoming withdrawals. But you can lose the interest you earn if you don’t follow the rules.
Withdrawal limits
Some accounts limit the number of times you can make withdrawals. In return for less flexibility, you’ll often earn a higher AER on the balance.
Finding competitive AER for savings accounts
Comparing rates from different providers helps you secure the best possible returns.
Cash deposit platforms like Flagstone offer hundreds of exclusive rates, giving you access to a wide range of options to grow your savings – all in one place.
Gross vs. AER: which is better?
Gross interest isn’t an accurate measure of what you’ll earn in a savings account over long periods of time. AER is more accurate, as it reflects the effect of compound interest.
Securing the right AER is important if you’re looking to maximise the earning potential of your savings. For the most competitive rates, consider looking beyond traditional high-street banks.
Tools that make it easy to compare rates can transform your cash into a financial asset.
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