Annual Equivalent Rate (AER)

What is AER?

Annual Equivalent Rate (AER), often called the Effective Annual Interest Rate or simply effective rate, is the actual return from a savings account, investment product or the cost of a debt at the end of the year (as one period). Unlike the Annual Percentage Rate (APR), AER takes the effect of compounding into account.

Although APR is meant to be used to compare rates among lenders, AER is a better indicator of the actual costs of a debt or the return on an investment.

How Is AER Calculated?

$AER=(1+\frac{i}{k}{)}^k-1$

Where $i$ is the nominal interest rate (APR) and $k$ is the number of compounding periods.