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Zopa's Jargon Buster: AER

Posted on 07 Jul 2009 by Jenny

AER is short for Annual Equivalent Rate. This is used by banks for savings accounts.

Put simply, AER is the estimated interest that you will receive over a year on your savings, assuming that each month you will be earning interest on a slightly higher balance to the previous month, due to interest accumulating.

Banks can choose to add interest annually, monthly, or at any other interval, meaning that different calculations have to be applied to make the AER comparable, so you can still compare the quoted rates between various savings accounts.

It is not defined by any legal or regulatory authorities, so it can change without notice, and it does not incorporate any fees.

The average lender return quoted on Zopa’s homepage is not an AER and so can’t be directly compared to a savings account. This is because Zopa isn’t a bank and as such it is Zopa’s lenders themselves who define the returns they each get. Their returns depend on a number of factors other than just the interest rate they set, including the speed at which money is lent out, the markets lent to, and whether or not borrowers repay early.

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