How does interest on a saving account work

Spir4

Hello,

I was wondering how exactly interest gets calculated for a saving account.
For example my saving account lets you add and withdraw as much as you want. It's got a 2.72% interest rate, and every 13th of the month interest gets paid out.

My guess is that it looks at your account every end of the day, calculates 2.72% on that and devides that by 365 (days in a year). It add up all those amounts from the 14th of the month until the 13th of the next month, and then it pays you the sum of those amounts (at the 13th of the next month).
Is that correct?

Thanks!

Brie

I suspect you are right but it may depend on the actual T&Cs of your account.  I've seen accounts in the past that have simple interest calculated monthly/quarterly/annually whereas you're talking more about compound interest.   Simple ones may base interest calculation on the base amount in the account - i.e. if you always have at least £25 in an account but sometimes have £50 or £75 they would still calculate the whole period as you having only £25.  This is more significant if there are longer period between when interest gets calculated and added to the account.  

eskbanker

Spir4 said:

For example my saving account lets you add and withdraw as much as you want. It's got a 2.72% interest rate, and every 13th of the month interest gets paid out.

If the 2.72% is the gross rate then yes, your workings are correct, but if 2.72% is the AER then the (lower) gross rate is used for the daily calculations so that compounding takes the annual return up to the published AER.

grumbler

Spir4 said:

... it looks at your account every end of the day, calculates 2.72% on that and devides that by 365 (days in a year). .

Almost, but not exactly, - if it's AER.

In fact, the daily rate is (1+0.0272)^(1/365)-1 = 0.007353%

For low interest rates the difference is very small: 2.72%/365 = 0.007534%

AmityNeon

Spir4 said:

My guess is that it looks at your account every end of the day, calculates 2.72% on that and devides that by 365 (days in a year). It add up all those amounts from the 14th of the month until the 13th of the next month, and then it pays you the sum of those amounts (at the 13th of the next month).
Is that correct?

Yes, as long as interest is calculated daily, and 2.72% is the gross interest rate (AER is used for comparisons, not calculations). Don't round to two decimal places until the final calculation. Some institutions (such as Atom Bank) keep a record of fractional pennies between months.

grumbler said:

In fact, the daily rate is (1+0.0272)^(1/365)-1 = 0.007353%

That figure would only be correct if interest was also paid and compounded daily. 2.72%/365 is the correct calculation in this case.

Spir4

I've had a quick look through the documents I've got, and this is what I've found:



I've chosen for a monthly payment. The title of the column says AER/Gross, so I assume they're the same with this account?

How can I know if they look at it on a daily base or on a monthly base? I can't imagine that if you start with £0 on your account, and put £1000 in on day 15, you won't get any interest because it hasn't been there for a whole month (14 till 13)?

eskbanker

Spir4 said:

I've had a quick look through the documents I've got, and this is what I've found:



I've chosen for a monthly payment. The title of the column says AER/Gross, so I assume they're the same with this account?

How can I know if they look at it on a daily base or on a monthly base? I can't imagine that if you start with £0 on your account, and put £1000 in on day 15, you won't get any interest because it hasn't been there for a whole month (14 till 13)?

You could read the bit that says "Interest is calculated daily...."?

AER and gross are only the same if paying annually, but if you've selected monthly payment then it is the 2.72% rate that's divided by 365 to give the daily rate.

ColdIron

Spir4 said:
How can I know if they look at it on a daily base or on a monthly base?

This is a bit of a giveaway

Nearly all bank accounts calculate interest on a daily basis

eskbanker

Spir4 said:

eskbanker said:

Spir4 said:

I've had a quick look through the documents I've got, and this is what I've found:



I've chosen for a monthly payment. The title of the column says AER/Gross, so I assume they're the same with this account?

How can I know if they look at it on a daily base or on a monthly base? I can't imagine that if you start with £0 on your account, and put £1000 in on day 15, you won't get any interest because it hasn't been there for a whole month (14 till 13)?

You could read the bit that says "Interest is calculated daily...."?

It doesn't say :-(

Maybe we're at cross purposes, but it clearly says exactly that in the image you shared?

Spir4

Oops, you're all correct, I misread that part  

Alright so discussion closed then I guess. It's calculated daily, and it looks at the amount that's on my account on that day, gives me 2.72% on it and devides it by 365. And the 13th of the month when the interest gets paid out it add all those amounts and pays me the total amount for that month (14-13th).

Thanks everyone for your help!

AmityNeon

If your interest date (as per your statement) is the 13th of each month, the monthly cycle may actually be the 12th-11th.

My eSaver account was opened and funded on 12th October, but my past two interest dates have been 13th November and 13th December, and my interest amounts match the 12th-11th exactly.