Definition of AER

Annual equivalent rate; a rate of interest which shows how much interest you receive from an investment in one year if each interest payment is added to the deposit before the following year's payment is calculated. [1]

AER - or the annual equivalent rate - not only takes into account the interest rate of a savings account, for example, but how often that interest is paid. Normally bank and building society accounts pay interest annually and, when this happens, the AER will be the same as the gross (before-tax) rate of interest. If, however, the same interest rate is paid more frequently, such as monthly, the AER will be higher. AER shows the true cost of a finance deal when either money is being borrowed or saved.

A savings account providing an interest rate of 4.65 per cent paid monthly actually has an AER of 4.75 per cent not 4.65 per cent. If the interest in paid annually the AER will also be 4.65 per cent. So if, for example, you are trying to find the best savings account make sure you compare like with like, i.e. a gross savings rate with another gross savings rate or an AER with another AER. [2]