Confusing Posted Rates

There are a lot of rules around how banks post the rates on their websites and in their branches.  The spirit of those rules is to make it easy for consumers to understand what the real cost or gain is to them.  I have to say that most banks do a pretty good job of trying to make their rates clear and understandable, but there is one product out there that continues to confuse people with its almost misleading rate advertisements – that is the escalator term deposit.

For most 5 year term deposits (redeemable or non-redeemable) the posted rate is the compounding rate you get on your money every year.  So a 5 year term deposit at 3.01% compounding annually means just that – you get 3.01% compounding every year.

For a 5 year escalator, the rates are laid out in the following way:
Year 1        0.4%
Year 2        1.1%
Year 3        1.3%
Year 4        2.1%
Year 5        6.4%

The rate you get each year is the rate posted for that year of the term.  The major problem is that most banks advertise only the 6.4% in a very large size, and say things like “Get up to 6.4% in Year 5,” often with the “in year 5” part in very small letters.  People end up thinking they are getting 6.4% compounding annually, but in reality you get an effective annual rate of 2.24%, very different from 6.4%.

Usually the bank will have the effective rate listed on their website or in the brochure as well, but not all of them.  Watch out for the escalators, because they are often not as good as that rate in year 5 makes them look.
Jerry