- Compound interest
- Compound interest is interest worked out on the original sum plus the interest already added, so the interest grows each year.
- Simple interest
- Simple interest is interest worked out only on the original sum, so the same amount is added each year.
Four terms on a savings or loan offer
Can you name the four terms that describe the rate on a savings account or a loan?
Bank Rate is the interest rate set by the Bank of England.
The annual equivalent rate (AER) is the interest a savings account would pay over a year, counting interest added more often than yearly.
Can you think of an example?
An account paying 4% a year, added monthly, has an AER of about 4.07%.
The annual percentage rate (APR) is the yearly cost of a loan or credit card, counting interest and any compulsory fees.
Can you think of an example?
Two loans charge 6% interest, but one adds a £200 arrangement fee, so its APR is higher.
A fixed rate stays the same for an agreed period, whatever happens to other interest rates.
Can you think of an example?
A five-year fixed mortgage keeps the same monthly payment even if Bank Rate rises.
A variable rate can change during the deal, often following Bank Rate.
Can you think of an example?
When Bank Rate rises, a tracker mortgage rises with it and the monthly payment goes up.