Calculation of interest rates

sunnygirl

Hi Everyone

This question has probably been asked a million times here, so I apologise, but how do banks work out interest rates? (that they add onto Savings annually)? I.e. if you have a savings account offering 4% Gross [and you have €2500 - what in effect (including DIRT tax) etc should the credit interest given on it?! - the interest is added annually.
Thanks in advance for your help!
Sunny

Long Onion

Look for the AER (Annual equivalent rate) this is the Gross Annual. An account which offers a lower headline rate of interest but pays it quarterly could return more than a savings account with a higher headline rate but which pays interest once per annum - due to the compound effect.

If you look at the AER, you can calculate the gross interest e.g. 4% of €25,000 - out of this interest you then deduct 23% or 26% (DIRT) and the remainder should be the interest payable.

Jet Black

So you would get €100 after the year. Then minus the dirt @23% would be €77interest payable.

sunnygirl

thanks people - so to get this right..the bank (specifically TSB) is offering 4% Gross on 2 of it's savings accounts
https://www.permanenttsb.ie/media/permanenttsb/pdfdocuments/depositrates/Deposit_Interest_Rates_23-09-2009.pdf
I multiply my savings balance by .04 to get the Gross interest earned on that amount. And then I take 25% DIRT tax off that amount to get the Net interest that should have been credited to my account?
Sorry for being so silly about this - but when I calculate it this way, I don't appear to have been paid the right amounts and wanted to check in with someone before I strode down to the bank and made a fool of myself!
s

Jet Black

I cant see the link. How did you deposit the money. Was it by cheque? When the account was open did you deposit the money straight away or was the account open for a while before you deposited the money?

If for example you went to the bank on 24/11/08 opened the account but did not lodge the money for a month. The account mature's today you wont get any interest for the first month because there was no money in the account.

Or if you lodged a cheque the bank may only give interest on the cleared balance which would be another week waiting on the cheque to clear.

sunnygirl

Hi Martys
I opened it about 2 years ago(?), and I deposit money into it (in varying amounts) 2-3 time a month.. so my current balance of 15k has accumulated since I opened it (with €4245 deposited in the last 12 months) - they pay interest each november...
sunny

Jet Black

Ok. So this is how the interest is calculated. Divide 4% by 12month's. Then for each month you made a deposit or the balance carried over from the previous month add the interest to this. Its quite confusing to work out.
I had a spreadsheet that took me about 8hours to make to work the calculation. I worked in the bank and had to make it up for the staff as even they did not know how to calculate the interest.

The interest in based on the cleared balance at the end of each day and added to the account on a yearly basis.

I know this has probably confused you more (sorry) but this is how it is calculated.

Its not as straight forward as x amount by y minus dirt equals net interest.