What does AER mean and how does it work?

AER is a common financial acronym that’s often seen alongside savings account interest rates. Here, we cover the basics of what AER is, how it’s calculated, how it’s different to other interest rate calculations, and what it means to you as an Irish saver.

The information provided here is for informational and educational purposes only and does not constitute financial advice. Please consult with a licensed financial adviser or professional before making any financial decisions. Your financial situation is unique, and the information provided may not be suitable for your specific circumstances. We are not liable for any financial decisions or actions you take based on this information.

AER stands for Annual Equivalent Rate, and it is the standard way of listing interest on savings accounts in Ireland. It shouldn’t be confused with APR (Annual Percentage Rate) or EAR (Equivalent Annual Rate), which are used to describe the interest charged on lending, such as loans and overdrafts.

It’s not unheard of for even experienced savers to ask the question “what does AER mean?”, so don’t worry if you don’t know.

AER is the interest rate most commonly used to make comparisons on savings accounts, because it allows you to see how much interest you’ll earn over a full year.

The AER makes it easier to compare savings accounts in Ireland and Europe by illustrating how much interest you could earn from a savings account if it were open for one year, regardless of the term or type of savings account or how often it pays interest.

You’ll see AER listed on many savings accounts, including deposit accounts, demand deposit accounts, regular savings accounts, and even children’s savings accounts. Because it’s a standardised way of displaying interest rates, looking at the AER means you can quickly compare how much you’d earn on different types of savings accounts.

You may find savings accounts in Ireland quoting both the AER and gross interest rate, which is why the AER is sometimes confused with the gross rate. The gross rate, sometimes called the ‘simple gross rate’, is the basic interest rate and typically does not take compounding into account. In contrast, the AER does consider compounding, so it can give you a better idea of what you’d earn over a year if your interest is paid and reinvested.

The gross rate may be higher or lower than the AER, but the AER makes it easier to compare savings accounts. Where an account offers compounding more frequently than once per year (for example, quarterly), you will likely find that the AER is higher than the gross rate.

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

It’s worth mentioning that neither rate includes DIRT (Deposit Interest Retention Tax). This tax gets taken off your savings interest automatically, so, provided you don’t qualify for an exemption, your final return could be slightly lower. Plus, some deposit accounts may lower your AER if you withdraw your funds early.

The interest you earn from a savings account could be paid to you as you earn it or at a later date, or it could be paid back into your savings account. If the interest is paid back into your account, you could earn interest on both your original deposit and any interest you previously earned. This process is known as compounding, and it can help your savings grow faster. 

Because AER includes the effects of compound interest, you’ll be better able to estimate your final earnings. Not all savings accounts compound interest, so it’s worth checking the details of a savings account before you apply.

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.

You’ll typically find that banks and other financial institutions in Ireland display each savings account alongside the AER, meaning you don’t usually have to calculate it yourself. At Raisin Bank, for example, you simply enter your deposit amount and choose a term, and you’ll see your estimated final balance based on each AER.

Here are the steps to calculating AER based on the gross interest rate:

1. Divide the gross interest rate by 100 to turn it into a decimal.

2. Divide this decimal by how many times interest will be paid in a year.

3. Add one.

4. Raise the result to the power of how many times interest is paid in a year.

5. Subtract one.

6. Multiply by 100 to turn it back into a percentage.

Say you have a demand deposit account with a gross rate of 2.25% and interest compounded and paid quarterly. This gives an AER of 2.27%, and shows how compounding every quarter gives you a little bit more over the year.

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 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 deposit of €10,000 with a 1.65% AER matures:

€10,000 x 1.65% = €165

€10,000 + €165 = €10,165

To calculate how much you’ll earn on 2-year, 3-year, or other deposit accounts, a slightly more complex compound interest formula is used, which takes into account how often interest is added to your balance. The longer your term and the more frequently interest compounds, the more you could earn.

At Raisin Bank, we do the maths for you so you can see how much you could earn from a savings account before you apply.

It’s always worth ensuring that you fully understand how a savings account works before you apply for it, but it’s especially important to check how interest is being advertised. Some banks advertise the gross rate of interest as well as the AER, and while these percentages can be the same, they can also differ. If you compare savings accounts from two different banks, but you use the gross interest rate from one account and the AER from another, you may end up with a misleading comparison.

AER variable means that your savings account provider can change the interest rate on your account, and it could go up or down. A savings account provider should advertise how much notice they’ll give you of a rate change.

Unlike fixed AER, the AER on variable rate accounts shows you what you could earn if the interest rate stayed the same for the entire year. However, because variable rates are not guaranteed and can change in response to shifts to the European Central Bank (ECB) interest rates, what you actually earn may be different.

With so many acronyms in banking, it’s easy to get confused. Here’s an overview of what AER means in relation to some other common terms:

• AER (Annual Equivalent Rate): Used in Ireland and Europe, AER shows the annual interest on an account, including where interest is calculated and added to the account throughout its term, making it easy to compare different savings accounts.

• APY (Annual Percentage Yield): APY also factors in the effects of compounding and shows the real interest you will earn on your savings, but AER is the preferred term in Ireland.

• EAR (Equivalent Annual Rate): Despite sounding very similar to AER, the EAR actually shows the annual cost of loans, credit cards, and overdrafts, and it includes compounding but generally excludes fees.

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.

The APR not only includes the interest rate but also the fees and charges that can come with borrowing. And unlike the AER, which assumes your money stays put and grows, the APR is adjusted to show how much your debt costs as you gradually pay it off.

Another important difference is that the APR can only be used to compare borrowing options with the same term. For loans with different lengths, you’d have to look at the total cost of credit. In contrast, the AER gives you a reliable way to compare savings accounts, even if they pay interest at different times or compound differently, because it’s always expressed as an annual rate.

We display the interest rates of all savings accounts on the Raisin Bank marketplace with the AER because it makes it easier to compare savings accounts so you can make an informed decision.

Find out how to register for a Raisin Account to apply for the best savings account for you.