# How to Calculate Bank Interest Rates

Banks, credit unions and most financial institutions invest the money that you deposit and pay you an interest fee as compensation. The interest rates vary widely. Learn how to calculate interest rates to find the bank that rewards you the most.

## Step 1

Locate the bank interest rates and any relevant information on your bank account statement. If you are comparison shopping, you may request a prospectus from other financial institutions.

## Step 2

Use the interest calculation "I=P_R_T" if you know the principal, rate and time of the bank account. The amount of money deposited is the principal. The rate is the bank interest rates you found in Step 1. Finally, time is the number of years for which your principal is earning interest.

## Step 3

Plug each individual amount into the calculation noted in Step 2. For example, let's say you have deposited a principal of \$4,500 into a bank account that pays 9.5 percent interest, and you plan to leave the principal in the account for six years. The resulting calculation would be I=(4,500)(9.5)(6). When calculated, the bank interest over that period of time would be \$2,565.

## Step 4

Modify the bank interest rate calculation if your bank account statement or prospectus notes the interest rate in days. In the "Time" section of the calculation, note the number of days over 365. For example, if you deposited \$4,500 into a bank account with an annual interest rate of 9.5 percent but only left the money in the account for 45 days, the calculation would be: I=(4,500)(9.5)(45/365).

## Step 5

Note that in comparing rates, you should see how often a bank compounds interest. If you have \$1,000 deposited in a three-year term at an interest rate of 5 percent compounded annually, your second year's interest would be based on a principal of \$1,050, and your third year's interest on a principal of \$1,102.50. Some banks compound as frequently as daily or monthly. To make sure you are doing apples-to-apples comparisons, look for the APY or annual percentage yield of the CD or bank account. (A link to a compound interest rate calculator is listed in Resources below.)

## Step 6

Consult online resources such as BankRate (see Resources) when comparing bank interest rates. Such sites aggregate data from a variety of financial institutions to save consumers from having to calculate interest rates on their own.

references & resources