Interest rates question

darv87

Today I went to a bank to start a student account. This particular student account had an interest rates of 2.5% gross p.a, 2.53% AER and 2.00% net p.a.

Right, I am no interest rates expert, but when the desk-woman told me that interest is paid monthly and therefore if I were to deposit £1000 in my account, I would get £25 in interest per month, I started to question whether she worked at the bank at all!

I am a little confused as to the difference between 2.5%/2.53%/2.00% gross/AER/net, so could anybody help explain this to me?

jimclark1967

Sadly it'd be more like £25.30 per year

2.5% gross is the actual rate applied to the balance to work out the interest.

2.53% AER is the equivalent rate you would get if interest was paid annually rather than monthly. In this case it's marginally higher because you get interest on the interest as the months go by. The AER makes it easier to compare different accounts like for like.

2% net is just the gross rate minus savings tax at 20% which you can avoid if you earn less than £4895 a year and fill in an R85 form.

JC