How Do You Calculate APR on A Savings Account

Annual Percentage Rate (APR) is a key metric for savings accounts that shows the annual interest rate on a loan or deposit. Calculating APR helps you compare different financial products and understand the true cost of borrowing or the return on your savings.

What is APR?

APR stands for Annual Percentage Rate. It represents the annual cost of borrowing or the annual interest earned on a deposit, expressed as a percentage. APR is calculated on the principal amount of a loan or the balance in a savings account.

For savings accounts, APR is the interest rate that the bank pays on your deposits. It's important to note that APR is different from Annual Percentage Yield (APY), which includes compounding effects.

How to Calculate APR

The basic formula to calculate APR is:

APR = (Interest Earned / Principal Balance) × 100

Where:

Interest Earned - The total interest earned during the period
Principal Balance - The original amount of money deposited

For example, if you deposit $1,000 in a savings account and earn $25 in interest over one year, your APR would be 2.5%.

APR is typically calculated on a daily or monthly basis and then annualized. Some banks may use a 360-day or 365-day year calculation, which can affect the final APR.

APR vs. APY

While APR and APY both measure interest rates, they are calculated differently:

APR is the simple annual interest rate, calculated on the original principal balance
APY includes the effect of compounding interest, providing a more accurate picture of the return on investment

For example, if a savings account offers a 1% APR compounded monthly, the APY would be higher than 1% because of the compounding effect.

Term	Definition
APR	Annual Percentage Rate - Simple annual interest rate
APY	Annual Percentage Yield - Interest rate including compounding

Example Calculation

Let's say you deposit $5,000 in a savings account with a 1.25% APR. Here's how to calculate the interest earned:

Interest Earned = Principal × (APR / 100) × Time

For one year:

Interest Earned = $5,000 × (1.25 / 100) × 1 = $62.50

So, you would earn $62.50 in interest over one year, and your APR would be 1.25%.

FAQ

What is the difference between APR and APY?: APR is the simple annual interest rate, while APY includes the effect of compounding interest, providing a more accurate picture of the return on investment.
How is APR calculated for savings accounts?: APR is calculated by dividing the interest earned by the principal balance and multiplying by 100 to get a percentage.
Can APR be negative?: Yes, APR can be negative when it represents the annual cost of borrowing, such as with credit cards or loans.
Is APR the same as interest rate?: For savings accounts, APR is essentially the interest rate, but for loans, APR represents the annual cost of borrowing.