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What is Interest?

How interesting Interest is the name given to any extra money that we are paid by the bank or building society on our savings, or the extra we are expected to pay the lender on any of our borrowings. With your savings, you should aim at getting the highest rate that you can. However, when it comes to your borrowings, you should try and get the lowest rate that you can. Annual Equivalent Rate (AER) Depending on the account that you open, most banks and building societies will pay you a small amount of money for leaving your cash in one of their accounts. This extra money that they pay you is commonly known as interest. The interest received on a savings account is referred to as the Annual Equivalent rate (AER). Any interest rate quoted as an Annual equivalent rate will only be accurate if you do not withdraw money from your account during the year in question. The reason for this is that the AER illustrates what the interest would be if the interest was paid and compounded (added to the interest from previous payouts). Therefore, any withdrawals that you make from the account can affect the rate you will receive at the end of the year. Please note that if you are a UK taxpayer you will also need to deduct 20% from any interest calculation as the interest you earn is a taxable source of income. Most banks and building societies will quote the interest a gross amount (before tax is taken), and will pay the interest into your account as a net amount (after tax is taken). Annual Percentage Rate (APR) Any borrowings that you may have will charge you interest, instead of paying you interest. The interest that you are expected to pay is often referred to as the Annual Percentage Rate (APR). The APR is the rate of interest that a lender is required by law to quote, and it represents the true cost of the borrowing. If you are looking to take out any form of borrowing, then you should try and get the lowest APR you can, as this will be the total amount of interest that you are expected to repay over the course of your agreement.