Interest rates reflect the cost of borrowing money. When you take out a loan you are charged interest on the amount borrowed. AER stands for "Annual Equivalent Rate" and it is a way to express the interest rate on a savings account or other type of deposit account in a way that makes it easy to compare the effective rate of interest you will receive.
AER takes into account the effect of compound interest and expresses the rate as if interest were paid and compounded once per year. So AER is a standardised way to compare the interest rates across different accounts, and make sure you understand the interest you earn.
Interest rates are also relevant to savings accounts but for this, they are usually referred to as the “yield” or “return” on your deposits.
There are several factors as to how interest rates are determined. This includes the monetary policy of the central bank (such as the Bank of England), the strength of the economy and the overall level of inflation.
There are several different types of interest rates which can apply to different types of financial products. The two common types of interest rates are:
There are different types of interest rates that can impact the overall cost of a loan. It’s important to understand the type of interest rate that applies to any given product before making a financial decision. See the best saving interest rates.
Interest rates can affect and benefit your savings account by increasing the amount of money you earn on your deposits. Often, when you deposit money into a savings account, the bank pays you interest on that money. This is expressed as an annual percentage of the total deposit.
When interest rates are high, it means you can earn a higher return on your savings. This can help your money grow faster. High-interest rates can also help you protect the value of your cash against inflation. This means that your savings lose less value over time.
Interest rates can vary widely between different types of savings accounts and between banks. It’s always important to do your research into savings accounts and banks to ensure you’re getting a competitive interest rate and that your money is protected by initiatives such as the FSCS (Financial Services Compensation Scheme).
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