How to Calculate Annual Interest Rates

by Bennett Gavrish ; Updated September 11, 2015

When you open a savings account or take out a loan from a bank, you will be quoted an interest rate known as the APR, or annual percentage rate. However, this rate does not account for compounding of interest every year. To find your true interest rate with compounding included, calculate your annual interest rate.

Write down the quoted interest rate of your savings account or loan and the number of years you plan to keep the account or loan.

Convert the quoted interest rate into a decimal, then divide it by the number of years you plan to keep the account or loan. For example, if you have a savings account with 5 percent interest and want to keep the account for 10 years, then divide .05 by 10 to get .005.

Add 1 to the result from Step 2. For example, if your result from Step 2 was .005, then add 1 to get 1.005.

Put the result from Step 3 to the power of the number of years. For example, if your result from Step 3 was 1.5 and you plan to keep the account for 10 years, then put 1.005 to the power of 10 to get approximately 1.0511.

Subtract 1 from the result of Step 4 to calculate the real annual interest rate. For example, if your result from Step 4 was approximately 1.0511, then subtract 1 from that to get .0511, or an interest rate of 5.11 percent.

About the Author

Bennett Gavrish is an I.T. professional who has been writing about computers, electronics and the Web since 2004. His work has appeared in the "Nashua Telegraph" and the "Daily Free Press" and on numerous websites. Gavrish received a bachelor's degree in journalism from Boston University.