Bank Interest calculation

lindabea

I received a statement of my interest on a savings account which I consider to be incorrect. I asked the bank for an explanation of how they worked out the interest, and this is what they told me:

The account was opened on 1/06/12, so they calculated the interest for 214 days to 31/12/12. However, since 2012 was a leap year (this is the cause of the discrepancy), they pro-rata the interest based on 366 days over the year. So, in my case they took the interest due over the whole year of 2012, divided the amount by 366 and then multiplied the result by 214. The other portion of the interest ie 1/01/13 - 31/05/13, again,they calculated the interest for the whole year (365 days), divided by 365 and multiplied by 151.

Consequently, the interest paid is (admittedly) short by a few pounds; before I start making any formal complaints, can some expert on here give me some advise and tell me if this is a correct way of calculating the interest during a leap year. It doesn't sound right to me as I'm certainly not getting the interest over the 365 days that my money had been invested.

opinions4u

They've worked out exactly how I would have expected them to if interest was payable annually on 31st December.

Although I understand why you'd feel slightly baffled given the leap day occurred prior to you opening the account.

innovate

It all depends on the T&Cs of the account. If the T&Cs say they calculate interest annually (calendar year), it seems they have calculated it correctly. If the T&Cs say any different, the different rules apply.

What are the T&Cs of the account? Can you post a link to them?

As an aside: you have been saving if you had your money in a bank account that paid interest. Investing is very different - you would have bought shares, funds, trust or bonds, none of which pay interest.

lindabea

opinions4u wrote: »

They've worked out exactly how I would have expected them to.

Thanks for your reply. Why do you think they're right? My money was invested for 365 days. Clearly, I received less than the amount which would have been paid had 2012 not been a leap year. Also, my account started after Feb, so the extra day should not come into the equation.

innovate

lindabea wrote: »

Why do you think they're right?

Because the interest you got paid is almost certainly exactly as per the T&Cs you accepted when you took out the account

lindabea wrote: »

My money was invested for 365 days.

Your money was saved, not invested

lindabea wrote: »

Clearly, I received less than the amount which would have been paid had 2012 not been a leap year.

2012 was a leap year.

lindabea wrote: »

Also, my account started after Feb, so the extra day should not come into the equation.

Your account was subject to the T&Cs you accepted when you took out the account

opinions4u

lindabea wrote: »

Thanks for your reply. Why do you think they're right?

I didn't say they are right. I've not read the small print for your account. But they almost certainly are correct.

But there were 366 days in 2012. Interest is accumulated daily. You earned interest for 214 days. It seems perfectly logical that you should earn a fraction of a year's interest based on a division by 366.

I received less than the amount which would have been paid had 2012 not been a leap year.

The whole year is a leap year. Not just 29th Feb.

When was interest capitalised (compounded) to your account?

If you complain loudly enough they'll probably roll over and pay up. But it wouldn't make you right.

SnowMan

lindabea wrote: »

Consequently, the interest paid is (admittedly) short by a few pounds; before I start making any formal complaints, can some expert on here give me some advise and tell me if this is a correct way of calculating the interest during a leap year. It doesn't sound right to me as I'm certainly not getting the interest over the 365 days that my money had been invested.

It is completely reasonable, logical, straightforward and pragmatic for them to calculate it that way.

Someone who had saved from 1st March 2011 to 1st March 2012 would get more than a 'year's interest' in contrast so it is not a systematic error against the saver which is the main thing.

I suppose banks could just pay 1/365 of the yearly rate per day in every year including leap years but that would mean savers would on average get more than a year's interest every year.

The n/365 way of calculating interest is a very slightly generous way of calculating interest in any case for people saving for less than a year.

lindabea

OK Thank you Innovate and Opinions4u for your replies. It sounds that my thinking is not correct, as I'm sure you guys know more than I do on this subject. But the method of interest calculation that the bank uses during a leap year is misleading. To me, annual interest calculation should be calculated over a rolling 365 days. Isn't that what is meant by an AER, otherwise the AER would vary depending on whther the year in question is a leap year or not.

SnowMan

lindabea wrote: »

To me, annual interest calculation should be calculated over a rolling 365 days. Isn't that what is meant by an AER, otherwise the AER would vary depending on whther the year in question is a leap year or not.

AER is a yearly rate. So that logic is based on an incorrect assumption that there are 365 days in a year. There are either 365 or 366 days in a year, on average approximately 365.25. To ignore the 0.25 is wrong. That is the counter-argument.

That said there is no 'correct' answer.

lindabea

SnowMan wrote: »

Someone who had saved from 1st March 2011 to 1st March 2012 would get more than a 'year's interest' in contrast so it is not a systematic error against the saver which is the main thing.

This is my point - someone who opened an acount over the whole of a leap year would receive an extra day's interest; by contrast someone who's account covers the whole of 365 days but not including the extra day, would in fact receive less interest ie not equivalent to 365 days This makes the whole system absurd and unfair. This is something I had not realised until now.

lindabea

SnowMan wrote: »

To ignore the 0.25 is wrong. That is the counter-argument.

That said there is no 'correct' answer.

No - ignoring the 0.25 is not wrong; in this context. Our calendars are based on 365 days. The leap year is purely an astronomical correction - and irrelevant for accounting purposes