Saver query

[Phil Jones]

This is probably a fairly simple question to most of you but here goes;

When looking at Saving tables to find the best, some say they calculate interest Monthly and some Yearly. Surely if Monthly then the interest gets added to the capital and then incurs further interest on it next month, where if yearly there is only the one hit.

So for 2 companies with the same rate - surely you would get more interest for the one paying monthly rather than yearly.

AM I right in this assumption ??

Phil

 

[GeneralZod]

You need to compare AER rates, which is a normalised measure, to be sure you're comparing like for like for products with different schedules for applying interest payments.

If two banks were offering the same daily interest rate with one adding interest to the principal monthly and the other annually then it would make sense to choose the monthly bank. The AER rates for the two accounts would indicate that the monthly account is the better one.

Normally you'll see lower daily interest rates paid on monthly accounts.

Here's the formula relating the two

At the end of the month or year or other period the bank calculates the gross interest payment as follows

Interest payment = Principal * Daily Interest Rate * Number of days in month or year / Number of days in year

If the interest rate varies then they'll do multiple calculations for each period a different interest rate applied and add up the individual amounts.