AER
What is it?
The AER (Annual Equivalent Rate) is a standardized measure that represents the annualized cost or return of a financial product, considering both the interest rate and other associated costs. This rate is used to compare financial products with different characteristics, such as loans, mortgages, or deposits, as it integrates all additional expenses (commissions, insurance, etc.) that may be associated with the transaction. The AER provides a clearer view of the real cost or profitability of a financial product, as it considers the compound effect of interest on the invested or borrowed capital.
It is especially useful when comparing loans or investment products with different conditions and terms, as it provides a single rate that reflects the total impact of additional costs and the interest rate on the return or cost over the course of the year.
Key aspects to consider
The AER not only includes the interest rate, but also other additional costs that may affect the financial product, such as setup fees, mandatory insurance, or any other related costs. This is why the AER is an essential tool for evaluating the real profitability or cost of an investment or loan.
It is important to note that the AER assumes that interest is compounded annually, meaning that the rate reflects the compound effect of interest, although in practice, payments may be made monthly, quarterly, or annually, depending on the product.
When comparing financial products, the AER allows investors and borrowers to make more informed decisions, as it provides a clear and comparable measure of annual costs or returns. However, investors should be aware that the AER does not always fully reflect the risk of a product, so it should be considered alongside other factors such as the issuer’s solvency or the liquidity of the product.