Confused about daily interest and compound interest

reg091

Researching savings accounts and it seemed to me that by far the best option is interest paid daily  as it would compound. This can't be true or else why would anyone take interest paid monthly or yearly?

My understanding of an interest paid daily account is that if you start off with £100 and the interest rate is 5% the next day you have £105. The next day you have £110.25 etc.

If you opt for interest paid yearly then I understand it calculates the interest at the close of business every day of the year and adds those numbers together. So, there is no compounding.

I must be wrong! Everyone would have interest paid daily accounts and monthly/yearly wouldn't exist!

Can someone enlighten me please?

Dazed_and_C0nfused

reg091 said:

Researching savings accounts and it seemed to me that by far the best option is interest paid daily  as it would compound. This can't be true or else why would anyone take interest paid monthly or yearly?

My understanding of an interest paid daily account is that if you start off with £100 and the interest rate is 5% the next day you have £105. The next day you have £110.25 etc.

If you opt for interest paid yearly then I understand it calculates the interest at the close of business every day of the year and adds those numbers together. So, there is no compounding.

I must be wrong! Everyone would have interest paid daily accounts and monthly/yearly wouldn't exist!

Can someone enlighten me please?

If only that were true!

If the daily interest was 5% it would be a scam.

If the annual interest was 5%, which is possible without it being a scam, then £100 would earn just over a penny in interest.

ColdIron

reg091 said:

My understanding of an interest paid daily account is that if you start off with £100 and the interest rate is 5% the next day you have £105. The next day you have £110.25 etc.

£5 a day, if only

You need to read and understand this

https://www.moneysavingexpert.com/banking/interest-rates/#save

TheSpectator

Interest is calculated daily on most mortgages and if we used your logic we'd all be owing millions by now.

flaneurs_lobster

Dazed_and_C0nfused said:

If the annual interest was 5%, which is possible without it being a scam, then £100 would earn just over a penny in interest.

er, isn't the amount earned £5?

TheSpectator

flaneurs_lobster said:

Dazed_and_C0nfused said:

If the annual interest was 5%, which is possible without it being a scam, then £100 would earn just over a penny in interest.

er, isn't the amount earned £5?

I think they meant a peny a day as OP talking about daily interest.

Dazed_and_C0nfused

TheSpectator said:

flaneurs_lobster said:

Dazed_and_C0nfused said:

If the annual interest was 5%, which is possible without it being a scam, then £100 would earn just over a penny in interest.

er, isn't the amount earned £5?

I think they meant a peny a day as OP talking about daily interest.

Correct, after one day they would earn ~1p in interest, not £5.

flaneurs_lobster

TheSpectator said:

flaneurs_lobster said:

Dazed_and_C0nfused said:

If the annual interest was 5%, which is possible without it being a scam, then £100 would earn just over a penny in interest.

er, isn't the amount earned £5?

I think they meant a peny a day as OP talking about daily interest.

Ah, I see. Just not used to seeing calculations showing daily earnings and made an erroneous assumption.

Apologies

reg091

Forget about the interest rate, is my assumption that the only account that pays compounded interest one that pays daily?

reg091

ColdIron said:

reg091 said:

My understanding of an interest paid daily account is that if you start off with £100 and the interest rate is 5% the next day you have £105. The next day you have £110.25 etc.

£5 a day, if only

You need to read and understand this

https://www.moneysavingexpert.com/banking/interest-rates/#save

Thanks. I do understand that but what about compounding? Surely if the interest is added to your balance daily then you would get more than if it just added once at the end of the year? I understand that a quoted interest rate is an annual amount (AER) so in the example given of £1000 at 1% doesn't mean you get 1% per day, you get a fraction of that. But the principle of compounding with daily paid interest surely means you will get more than interest paid at year end.

Hoenir

Interest isn't added daily to the account. Interest is calculated daily. What's key is how often it is paid to the account holder.