Annual v Monthly Interest

Starsky_4

Hi,

Can anyone explain if I am right in thinking that if a savings account offers a Monthly or Annual interest option there is no difference in the amount of interest paid at the end of a full year ?

Rates are generally lower for the monthly option (e.g Northern Rock have Monthly @ 5.16% and Annual @ 5.41%) which I assume is due to compund interest where the cleared amount will increase monthly, as opposed to the annual option where it will remain the same (assuming no more payments/withdrawels) until the year end when a payment wil be made.

If the total interest paid is indeed equal - are there any advantages of one option over another.

Regards,

Reaper

As you suspect interest rates on accounts paying monthly are lowered slightly to cancel out the benefits of compounding the interest.

In order to look at how much you will get after a year including compounding use the AER figure. In the case of Northern Rock if it is the Tracker Online account you are looking at the monthly is 4.54% and the yearly 4.7%. So in theory you should actually be better off going for the annual option.

BUT these accounts include a bonus interest rate for 6 months which is not included in the AER figures. This will favour the monthly option as it helps the compounding.

Without attempting to work out the figures I would make a guess and say this will make the two options identical.