UK Accounting Glossary
Bank interest rates vary according to a number of reasons. Banks change the rates of interest they offer to customers for two basic reasons. When the Bank of England’s Monetary Policy Committee changes base rate, bank interest rates will usually, though not always, be changed to reflect the increase or decrease in base rate.
However, bank interest rates, because they reflect the products that the banks are trying to market to consumers, may also be changed to reflect the product mix that a particular bank is trying to promote.
Bank interest rates are quoted differently depending on whether you are saving money or borrowing money. They are expressed as a percentage and may be quoted in a number of different ways. However, there are two specific figures that you should look out for as they will allow you to compare one bank’s products with those of another.
Savers should look for the AER – Annual Equivalent Rate. This a notional rate that’s generally quoted on interest paid on savings and investments. It purports to demonstrate what your interest return would be if the interest was compounded and paid annually instead of monthly (or any other period).
Borrowers should look for the APR – Annual Percentage Rate. Personal loans, credit cards, mortgages and overdrafts may be quoted at introductory rates of interest that sound enticingly cheap. However, what the introductory rates fail to include are any arrangement fees you may be charged for loans and they also won’t immediately reflect any higher rate of interest that your borrowings will ultimately revert to. The APR will.
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This glossary post was last updated: 15th February 2020.