The Annual Equivalent Rate (AER) is the interest rate for a savings account or investment product that has more than one compounding period. AER is calculated under the assumption that any interest paid is included in the principal payment's balance and the next interest payment will be based on the slightly higher account balance. By definition, AER must be equal to or greater than APR.For example, if an investment has an APR of 8%, but compounds quarterly, then its AER would be 8.16%. The extra 0.16% accounts for the fact that you're earning interest on top of your original investment as well as on accrued previous interest payments.A key advantage of knowing your product's AER rather than its APR is that it can help you compare different products more easily. For instance, “if you're looking at two savings accounts with different APRs but identical compound frequencies, then it's obvious that the account with the higher APR offers a worse deal - even though both accounts may have exactly the same AER Since they compound at identical rates."When shopping around for a new savings account or investment product, it's important to know what Annual Equivalent Rate (AER) means in order to make an accurate comparison between products. The annual equivalent rate takes into consideration not only a product's advertised Annual Percentage Rate (APR), but also how often the underlying interest compounds. This number can help consumers identify which products offer better value, since banks are required by law to advertise their products' APRs. For example, if two investments have identical APRs but one compounds monthly while another compounds annually, then the former will always offer consumers a better return due to its higher frequency of compounding.
