How to Calculate Effective Interest Rate

A bank or other savings institution will quote you with an annual percentage rate, or APR, for a new savings account or loan. However, this percentage does not account for interest accrued due to yearly compounding. You can use the APR to calculate the effective interest rate and determine the growth of your account or loan with compounding included.

Things You'll Need

• Scientific calculator

Instructions

1. Make a note of the APR for your savings account or loan and the number of years you plan to keep the account or loan for.

2. Convert the APR to a decimal and then divide it by the number of years you plan to keep the account or loan for. For example, if your APR is 10 percent for five years, then you would divide .1 by 5 to get .02.

3. Add 1 to the result of Step 2. For example, if your result from Step 2 was .02, then you would add 1 to that and get 1.02.

4. Put the result from Step 3 to the power of the time period. For example, if your result from Step 3 was 1.02, and you plan to keep the account or loan for five years, then you would put 1.02 to the power of 5 and get approximately 1.104.

5. Subtract 1 from the result of Step 4 to find the effective interest rate. For example if your result from Step 4 was 1.104, then you would subtract 1 from that to get .104, or a 10.4 percent effective interest rate.