Which is better? Monthly or Yearly Interest?

owitemisermusa

Hello,

Been struggling with this one folks. Would appreciate some help.

With interest calculated daily, does it matter if the account pays monthly or yearly interest? Would the total amount at the end of the term (eg one year) be different?

To me, it appears that it would be less with annual interest because if paid monthly, you earn further interest on the new amount (ie compound interest).

Have i got this right?

Another thing, some accounts pay differing rates for monthly and yearly interest.

Thanks a million folks.

OMM/OWM

debbie42

You can compare accounts with different timings on paying and calculating interest by looking at the AER rate.

You may see different gross rates for monthly vs. annual interest payments on the (otherwise the same) accounts. The annual ones would normally be slightly higher gross rates. Often if you look at the AER rates they will be the same for such accounts.

owitemisermusa

So, if the AER is the same, that means it's immaterial when interest is paid and my total amount is the same overall?

Still confusing me a bit.

debbie42

owitemisermusa wrote: »

So, if the AER is the same, that means it's immaterial when interest is paid and my total amount is the same overall?

Essentially, yes. There may be other reasons why you'd want one type (monthly/annually) as opposed to the other. Apart from the obvious one of wanting a more frequent payment, there may be tax reasons why you want to be paid at a certain time.

Aegis

You'll get a fraction of a percent more with annual payments if you pay tax, but it's such a small amount that it's really not worth worrying about at all!