Monthly v Annual Interest

cadboll

Advice Please!

Various accounts seem to offer either monthly/annual interest - as I am a novice in financial matters I'm lost as to which is better? My hunch is that annual interest is the prefered option but have no sound financial proof for this - can anyone advise?

Many thanks.

Paul_Herring

Most accounts that offer a choice between annual and monthly interest tend to 'pay less interest' on the monthly option - i.e. the rate applied daily is less, however over the year, due to compounding the monthly interest (i.e. interest on the intrest) the overall anual equivilent rate (AER) is the same for both of them.

In summary, there is little difference between the two. However some people like seeing the interest being applied monthly since it appears to be giving results quicker.

isasmurf

Please take a look at the Savings FAQ for several links to this very question.
http://forums.moneysavingexpert.com/showthread.html?t=54288

Stonk

Paul_Herring wrote:

Most accounts that offer a choice between annual and monthly interest tend to 'pay less interest' on the monthly option - i.e. the rate applied daily is less, however over the year, due to compounding the monthly interest (i.e. interest on the intrest) the overall anual equivilent rate (AER) is the same for both of them.

In summary, there is little difference between the two. However some people like seeing the interest being applied monthly since it appears to be giving results quicker.

Certainly not! All accounts that offer a choice do indeed "pay less interest" on the monthly option. However, in most cases, it compounds to a lower AER. A notable exception is Bradford and Bingley's internet savings account, where the monthly and annual rates work out to be the same - but this is most definitely the exception rather than the norm.

Fatboy_NSS

Annual is the best option. Interest is calculated daily and with the annual option this would be at a higher rate. If you take out the account with a lump sum and then withdraw it in 12 months you should get the same amount with either the monthly or annual option, but if you're paying money in and taking out at various points during the year then the annual would earn more interest.

Stonk, are you sure? The only examples I can think of where there's a difference between the annual and monthly APR is a tiny fraction of a percent which is due to rounding.

masonic

Fatboy_NSS wrote:

...If you take out the account with a lump sum and then withdraw it in 12 months you should get the same amount with either the monthly or annual option...

If you are a taxpayer and you go for the monthly option then tax is deducted after each interest payment. Does that not mean that with equivalent gross APRs, you will end up with less interest due to the fact that the tax part of it is not compounded over the year?

Fatboy_NSS

masonic wrote:

If you are a taxpayer and you go for the monthly option then tax is deducted after each interest payment. Does that not mean that with equivalent gross APRs, you will end up with less interest due to the fact that the tax part of it is not compounded over the year?

Hmm, I think you're right there but have had a couple beers tonight so can't be bothered to do the maths. Anyways annual is always the best option!

Stonk

Fatboy_NSS wrote:

Stonk, are you sure? The only examples I can think of where there's a difference between the annual and monthly APR is a tiny fraction of a percent which is due to rounding.

That has been my past experience, anyway. I can't think of many up to date examples though - most accounts at the moment don't give you the choice. Nationwide's Members' Reward bond is one example: 4.96% AER for monthly, 5.15% AER for annual. Then again, Nationwide also has some accounts where you do have the choice and the AERs are virtually the same.

Anyway, it's worth being aware of the possibility you might pay for the psychological benefit of having monthly interest.