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Net, Gross And Aer

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ive had to start from scratch but am getting their slowly, but im in a position where i can put sum momey away to start get sum interest, ive seen a high interest deposit bond at hsbc but i dont quite underastand how it all works with the NET, GROSS AND AER, exactly what percentage of interest do i get and how does it all work? cus you get taxed im gettin confused now, as you can tell i just need a bit of help grasping a few things.

if i put 3k away for the 3years at 5.25% monthly interest like advertised does that mean i get £157.50 a month? (3000+5.75%=)

if some one clould explain to me in lamens terms (spelling?) id be much apreciative.

thankyou

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Gross interest = interest before tax

Net interest = interest after tax

AER = Annual Equivalent Rate

If you got your interest monthly, you would earn interest on the interest throughout the year. So the AER (yearly) would be higher than the gross interest stated.

I guess the example you mention is 5.25% gross interest per year. So every month you would get £3000 * 5.25% / 12months. The AER would therefore be slightly higher than 5.25%

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thanks for that jason, can i ask tho what is the anual equivalent rate? what exactly is it?

i made the calculation £13.125, i sthat how much intrest id get a month? sorry i am really crap at maths, lol

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Have you got a link to the product you are refering to?

Edit:

5.25% gross interest paid monthly, is 5.378188672746% AER

5.13% gross interest paid monthly, is 5.25% AER

Edited by Jason

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If you mean: http://www.hsbc.co.uk/1/2/personal/savings...gs/deposit-bond

The interest is paid at the end of each year, or monthly. If you opt for monthly it would go into a seperate account (e.g. your HSBC current account). If you want your interest reinvested, it will be paid annually (as there is no point in having is paid monthly as you can't access it).

Either way, the rate you would use to compare against other accounts is 5.25% AER

So you would get £3,000 * 5.25% for the first year = £3,157.5.

At the end of the 2nd year you would get £3,323.27.

At the end of the 3rd year you would get £3,497.74 before tax of course!

Edited by Jason

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No probs.

Okay genius, why does ICICI's HiSave a/c say it's 5.03% gross, 5.15% AER, when there is no introductory bonus period or any other "gotchas" that I can see ?

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Okay genius, why does ICICI's HiSave a/c say it's 5.03% gross, 5.15% AER, when there is no introductory bonus period or any other "gotchas" that I can see ?

Because the interest is paid monthly!!!

Hence the interest is earnt on the interest, so the AER is higher than the gross annual rate.

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I think i can summarise in simple terms:

Interest can be worked out in any number of wonderful mathematical ways and the banks abused this.

This became a problem as we couldn't accurately compare savings accounts anymore.

The solution created by the financial regulators is AER.

It basically means that if you put in any money over a year you gain AER % more money.

So if two banks have savings accounts you can ignore the interest rate and just compare AER. Obviously there is a relationship but 4.5% interest paid daily will have a higher AER than 5% interest paid at the end of the year.

So look for the highest AER.

On a side note you pay tax on the interest so interest free savings make a big difference but unfortunately that difference is not shown in the AER.

If you don't have a cash ISA and wish to invest £3,000 I would advise the NS&I Direct ISA. note you can only put a maximum of £3,000 in each tax year (tax year = April 2006 to April 2007).

Also APR is exactly the same as AER except it's the percentage interest you pay to borrow money. And exists for the same reason, so you can compare loans free from mathematical wizardry.

It's sometimes interesting to see APR figures quoted for loan shark style credit it can end up being a 1000% APR.

I hope this clears things up.

Andrew

PS I could've gone on about the math's behind it but really it's not that important anymore with the advent of AER and APR.

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • Even
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      • up 5%



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