Is AER always higher than the nominal (APR) rate?

Yes, AER is always equal to or higher than the nominal rate, because compounding always adds value. AER equals the nominal rate only when compounding occurs once per year (annually). With more frequent compounding (monthly, daily), AER exceeds the nominal rate. For example, a 4% nominal rate compounded daily gives a 4.081% AER — 0.081 percentage points higher than the stated rate.

Effective Interest Rate Calculator UK 2026

Q: How is AER calculated in the UK?

AER is calculated using the formula: AER = (1 + r/n)^n - 1, where r is the nominal (stated) annual interest rate and n is the number of compounding periods per year (e.g., 12 for monthly, 365 for daily). For example, a nominal rate of 5% compounded monthly gives AER = (1 + 0.05/12)^12 - 1 = 5.116%. UK banks are legally required to display AER for savings products.

Q: Which interest rate should I compare when choosing a UK savings account?

Always compare AER (Annual Equivalent Rate) when choosing between savings accounts. AER is standardised and accounts for compounding frequency, making it a fair comparison regardless of whether interest is paid monthly, quarterly or annually. UK regulators require all savings accounts to display the AER prominently. Never compare accounts using their gross or nominal rates alone.

Convert between nominal and effective (AER) interest rates. Understand how compounding frequency affects the true annual return on savings and loans.

Calculate AER from Nominal Rate

Nominal interest rate (%)

Compounding frequency

Frequently Asked Questions

What is the difference between AER and APR in the UK?

AER (Annual Equivalent Rate) shows the true annual interest you earn on savings, including compounding. APR (Annual Percentage Rate) is used for borrowing and includes fees. For savings, compare AER. For loans, compare APR. A higher AER on savings is better; a lower APR on borrowing is better.

How is AER calculated in the UK?

AER uses the formula: AER = (1 + r/n)^n − 1, where r is the nominal annual rate and n is compounding periods per year. For example, 5% compounded monthly: AER = (1 + 0.05/12)^12 − 1 = 5.116%. UK banks are legally required to display AER for savings products.

Why does compounding frequency matter for savings?

More frequent compounding means you earn interest on your interest more often. For a 5% nominal rate: annually = 5.000% AER, monthly = 5.116% AER, daily = 5.127% AER. The difference grows significantly over time and with larger balances.

Which interest rate should I compare when choosing a UK savings account?

Always compare AER. It is standardised and accounts for compounding frequency, making it a fair comparison between accounts regardless of whether interest is paid monthly, quarterly or annually. UK regulators require all savings accounts to display AER prominently.

Is AER always higher than the nominal rate?

Yes, AER is always equal to or higher than the nominal rate. AER equals the nominal rate only when compounding occurs once per year. With more frequent compounding, AER exceeds the nominal rate. A 4% nominal rate compounded daily gives a 4.081% AER — higher than the stated rate.