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Can someone please explain these interest rates to me?
Energize
Posts: 509 Forumite
On the kaupthings edge website, http://www.kaupthingedge.co.uk/OurProducts/InterestRates.aspx the AER rates are less than the gross rates, how is this possible?
For example the 3 year term has a gross rate of 7.16% the AER is 6.70%, which is even less than the 1 year term. Surely if you divide the Gross rate by 12 and add that each month, you get 7.3997%?
For example the 3 year term has a gross rate of 7.16% the AER is 6.70%, which is even less than the 1 year term. Surely if you divide the Gross rate by 12 and add that each month, you get 7.3997%?
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Comments
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It looks like they are compounding the AER rate over the period but the Gross rates are not compounded.I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.0
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How does that work?0
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The 7.16% is given once the end of the 3 year term. The AER rate is the equivalent if you were given interest every year and allows for "interest on the interest".0
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It's a good example of why showing the APR on loans became compulsory by law. APR and CAR are the same thing but CAR ought to be compulsory too.
£100 in the 3 year thing = 121.48 at the end. 21.48/3=7.16
121.48*1.067^-3=100 (6.70 is rounded to 2 decimal places)0 -
There is not necessarily any simple relation between AER and gross rates.
With simple, 'no bonus' accounts, straightforwardly paying interest monthly or on anniversary, there will be - but not all accounts are like that anymore.Imprudent granting of credit is bound to prove just as ruinous to a bank as to any other merchant.
(Ludwig von Mises)0
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