Confusion over Deposit rate interest terms.

S

Sneachta Pat

Registered User
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Hi Guys,
Currently shopping around to get the best value in deposit fixed rates out there. Just want to make sure i pick the best options which suits me, so i want to firstly clear up the correct terms. I see a particular product has a Gross return of 3.35% and an AER return of 2.5% over a 16 month period, while another product has a Gross return of 3% and an AER return of 3.06% over 12 months. Which option am i better off with???
 
Use AER as the key indicator.

You are better going for the product that pays 3.06% AER.
 
Does AAM have a article/page on these definitions, and especially one explaining AER/CAR? I think it's easy for people to be confused about these definitions, sometimes wilfully. An investment advisor from a certain large pillar bank recently gave me a prospectus with a fishy looking CAR figure, and when I went and checked the Central Bank rules it seemed to clearly violate them.
 
Aer:

annual equivalent rate (aer)
aer shows you what the interest on a savings account would be if the interest was compounded and paid out to you each year (instead of monthly or over any other period). You may earn less than the aer because your money may not be invested for as long as a year. Sometimes firms use compound annual rate (car) instead of aer on savings and investment products.
Click to expand...
 
I would have said AER shows you what the rate would be if it was compounded and NOT paid out to you each year, i.e. it assumes it is reinvested -- otherwise there would be no compounding.

For instance, the new Savings Certs 5 year product has a gross return of 15% over five years. That's a simple interest rate of 3% per year. The AER is 2.83% because that's the annual rate that if reinvested and compounded would give you 15% after 5 years, i.e.:

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Also it would help if DIRT was shown more clearly. This is such a substantial reduction in interest that it should be more upfront – perhaps included in the AER or a new version of the AER.

It would make comparisons with tax free state savings more transparent and would make the government tax much more obvious to consumers. Obvious taxes have less risk of government hikes.

Some people never tire of giving out about airlines throwing on a few tens of euros in tax and charges yet there seems zero concern that for most consumers advertised bank interest is now overstated by 50%. For example if your AER is 3% you’re really getting 2%.
 
I suppose in the same way that the airlines get away without showing baggage charges up front because not everyone has to avail of them, the banks get away without showing tax because not everyone is liable for it. I'd like both the banks and the airlines to have to show all the optional extras up front too.
 
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