Understanding interest - help!

pkg57

I struggle with maths at the best of times, but I just can't get my head around how Lloyds Bank calculate the following amount of interest on an account that pays 4% AER:

"If you save £200 each month, you'll earn £52.21 gross (£41.77 net) interest after 12 months. The interest is calculated on the balance of the account each month, so using the example above, the first month's balance would be £200, the second month £400 etc. and therefore the amount of interest paid will increase over the year in line with the balance of the account."

To me, 4% of the year's total of £2,400 is £96 gross, so how do they work it out to be £52.21??

veryintrigued

Month 1 you'll only receive 4% interest on £200.
Month 2 you'll only receive 4% interest on £400.

etc

Zippeh

Wont month 2 be interest on 200 + 200 + mth1 interest?

jimjames

pkg57 wrote: »

To me, 4% of the year's total of £2,400 is £96 gross, so how do they work it out to be £52.21??

You're assuming the bank is paying you interest on money that isn't in your account. Thinking logically why would they do that.

CLAPTON

pkg57 wrote: »

I struggle with maths at the best of times, but I just can't get my head around how Lloyds Bank calculate the following amount of interest on an account that pays 4% AER:

"If you save £200 each month, you'll earn £52.21 gross (£41.77 net) interest after 12 months. The interest is calculated on the balance of the account each month, so using the example above, the first month's balance would be £200, the second month £400 etc. and therefore the amount of interest paid will increase over the year in line with the balance of the account."

To me, 4% of the year's total of £2,400 is £96 gross, so how do they work it out to be £52.21??

the 'A' in '4% AER' stands for 'annual' so you only earn 4% if you save for the full 12 months

if you save 200 per month for 12 months then your 'average' savings balance over the year is
200 * 6.5 = 1,300 so the interest will be 1,300 x 4% = £52 approx

gross and 52x.8 = £41.6 after 20% tax

pkg57

CLAPTON wrote: »

the 'A' in '4% AER' stands for 'annual' so you only earn 4% if you save for the full 12 months

if you save 200 per month for 12 months then your 'average' savings balance over the year is
200 * 6.5 = 1,300 so the interest will be 1,300 x 4% = £52 approx

gross and 52x.8 = £41.6 after 20% tax

Oh my gosh, that's makes SO much more sense now. Thanks so much! :j