How do saving account interest rates work?

There are many questions that arise whenever we think about saving account interest rates. We will run through the ins and outs of APR and AER so you can know exactly what will happen to your money each year.

AER and APR can be the biggest draw a bank has in order to get you to choose them to keep your money safe over other institutions.  There are a few things you should be aware of though.

AER is the official rate of interest on savings accounts and it takes compound interest into consideration.  Since savings accounts shouldn't have any fees and charges, as you are kindly giving the bank your money to hold,  then the AER rate effectively tells you the exact amount your money will earn each year.  3.5% AER should pay 3.5% of your balance each year.

Sometimes banks quote accounts that pay APR which stands for Annual Percentage Rate.  So a bank account with 3.5% APR will pay 3.5% of the deposit amount.  APR doesn't include any bank charges either.  Many banks however have fees and charges unrelated to this rate which can eat into your savings.

Banks sometimes have tricks to make you think you are getting a great rate as you will be more inclined to keep your money with them.  One such ploy is offering an initial bonus for opening a new account.  This bonus then effectively distorts the AER for the first year of that account and leaves you under the impression that you are earning a really good rate.

Remember also that APR and AER saving account interest rates are before tax so the government are also going to get their cut of whatever interest you have earned each year.

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