Annual interest rate
If we had things our way, the world of finance would be a simple and easy place. Unfortunately, there are a lot of things you need to research and consider before making a move with your money. One of those is your interest rate. But wait - there are different sorts of interest rates, and it’s important you get them straightened out when you’re looking for the most competitive deal.
What is the annual interest rate?
The annual interest rate, sometimes called the standard annual interest rate or base rate, is the percentage value you usually see first when comparing financial products. It’s the basic interest that you’ll pay on your loan or earn on your savings account without taking compounding or fees into consideration. This means that the actual amount of interest you earn or pay will likely be higher than the stated annual interest rate.
Not to be confused with...
The comparison rate
Also called the annual percentage rate, the comparison rate represents the ‘true’ cost of a loan, including not only the interest rate, but also any fees and charges that apply. It’s designed to give borrowers a clearer, more accurate idea of what a loan might cost them.
Effective annual interest rate
Also known as annual percentage yield, this is a percentage value taking into account the effect of compounding interest over the life of your loan or account. This is the number you should be looking at for a better idea of what interest you’ll be seeing on a month-by-month basis.
Why is the annual interest rate important?
The annual interest rate is the figure on which all the other rates you need to know are based. It’s your base rate - and while it’s not always the best way to compare different products across financial institutes, it does make up a big part of what you’ll need to consider.
You’ll also need the standard interest rate if you’re planning to calculate interest on a loan yourself. Or, you can use our handy repayment calculators.
What else should I consider?
The interest rate is not the only important thing to consider when comparing banking products. You should take the offer into consideration as a whole package, and that includes factors like fees, features and special bonus offers.
Fees and charges
With either a loan or an account to stash your savings in, you might have to account for extra fees and charges beyond interest. For loans this might mean an application fee, monthly service or annual fees, while a savings account might charge a monthly account fee, or transaction fees.
You can use the comparison rate when looking at loans - it takes into account the set fees that you will pay, or when you’re comparing savings or bank accounts, it’s a good idea to use a comparison like Mozo’s, which shows the interest rate right next to account fees.
In a perfect world, you’d only have to account for simple interest. Unfortunately, compounding is an important factor that needs to be considered - especially when borrowing. The effective annual interest rate will show the effects of compounding on your interest, so keep an eye on it.
Loans on a fixed term, like a home loan, are calculated so each monthly payment is the same, but understanding compounding is especially important with things like credit cards. Because your payments depend on your spending and how much you choose to pay back, interest might compound differently each month. Check out our credit card interest rates page for more info.
Interest rates won’t take into account extra fees that might make a big difference to how you’re able to utilise your money. Features you might want to consider include online banking or branch access options, introductory or bonus interest rate periods, or, specifically for loans, things like an offset account, extra repayments, repayment holidays or redraw facility.
Keep in mind that some extra features might mean extra fees or a change in your interest rate, so it’s important to weigh up the costs and benefits - will you actually use all the features you’re paying for?
How to compare annual interest rates
Head over to our compare interest rates page for free, easy to read comparisons of a range of different banking products. You can also use Mozo’s financial calculators to see what effect different interest rates might have on your loan or account.