Annual equivalent rate (AER)
What is the annual equivalent rate (AER)?
The annual equivalent rate (AER) is a re-calculation of the rate of interest on a loan or other debt product to give the figure as it would be if it were calculated annually. This is valuable for consumers with debts where interest is worked out monthly or quarterly.
Where have you heard about the annual equivalent rate (AER)?
In some jurisdictions, credit providers are obliged to tell borrowers of the AER. Consumer groups elsewhere claim AER is the clearest measure of interest, so if it's not automatically given where you are you may still have heard it suggested that AER should be the standard measure of the cost of credit.
What you need to know about the annual equivalent rate (AER).
The AER allows borrowers to see through the complications of loans and other products in which the compounding of the interest is worked out at intervals of other than a year, such as weekly, monthly or quarterly. This helps give borrowers greater clarity about the cost of the credit, known as the nominal interest rate. The AER recalculates the interest rate by figuring out what the total cost of the loan would be if it was structured in the conventional way, with interest compounded annually. It should not be confused with the Annual Percentage Rate (APR).
Find out more about the annual equivalent rate (AER).
To learn more about how rates work and how they can inform financial decisions, see our definition of the annual percentage rate.