How is interest calculated?

Rarchy

Apologies if this is a stupid question. I have very little knowledge/understanding of banking so need some of your thoughts...

As I said in another thread I'm thinking about opending the 10% A&L ISA. I was looking at the savings calculator and as the A&L pays out in January I thought I'd work out how much interest I would earn by this point if I put in say £200 a month.

So, in my dumb mind this would be 9 months saving so £1800, therefore at a rate of 10% £180 interest and I would have £1980.

But no it says I would have £1873.31 after 9 months - where does this come from? For me £73.31 earned in interest doesn't really seem worth it after 9 months... and I thought 10% seemed so high!

So how is it calculated?

Aegis

You've worked out the interest you'd get if you started with a £1800 lump sum. As your money is being drip-fed in, it's going to be less because the first £200 will be in for 9 months, then the next £200 will be in for 8 months, etc. Add up the total interest on that lot and you'll reach your magic figure.

Rarchy

Oh right I see what you mean. I thought they worked out the interest on however much was there when it was paid out!!!

I remember doing about this at uni (I found it confusing then), as you can probably tell finance wasn't my favourite subject...

Oh well, suppose 10% is still better than 6.25%...

Aegis

Rarchy wrote: »

Oh right I see what you mean. I thought they worked out the interest on however much was there when it was paid out!!!

If that were the case I'd be moving very large sums of money into the accounts shortly before the interest was due

As it happens, the interest is calculated daily, so you need to keep the full amount in all the time if you want to receive the full AER on your money.