APR, or Annual Percentage Rate, is the annual interest rate an individual pays on loan or receives on savings in their bank account. Investors receive APR on everything from savings accounts and fixed deposits to recurring accounts. Ultimately, APR is a percentage term that expresses the amount that a bank pays to depositors for the privilege of using their saved money. When it comes to calculating interest on savings account, common advice usually includes checking for the lowest fees, opting for the highest APR, learning what APR is and how to calculate it annually. Saving optimally and understanding the working of APR makes a person well-equipped to get the maximum benefit.
Below, you will learn what APR is, how it works, and how to calculate it efficiently.
How Does Annual Percentage Rate Work?
Every time a person deposits money in a savings account, the bank uses it to lend to others and charges interest on it. In return, they pay a portion of that interest to the depositors for the privilege of borrowing their money. The APR is the interest percentage an account holder receives on their savings.
Here is an example to clarify the concept further. An individual deposits ₹ 25,000 in a savings account, and the bank offers 5% interest on it. That means the account holder will receive regular interest payments of around ₹ 470. While the original savings remain the same, the bank balance changes as the bank makes interest payments. Accumulated interest over a longer period is the primary reason why most people opt for saving account opening with banks offering high APR.
Factors Affecting the APR
Whatever the saving needs are, a flexible and secure savings account is everyone’s best bet. A savings bank account is a safe avenue for people’s surplus funds and simultaneously lets them grow. Several banks offer excellent options these days, so one can easily open an account online without visiting the bank branch. However, several factors affect the APR one receives on their savings. Here are the top ones:
- Repo Rate: The RBI decides the repo rate based on demand and supply, inflation rate, and economic conditions. The repo rate ultimately affects the APR a depositor earns on their savings. Although the interest rate may differ between banks, reading the fine print carefully is essential during the saving account opening process.
- Minimum Balance: Typically, most banks require their account holders to maintain a minimum amount in their savings accounts. Such limited accounts may have a lower APR than standard accounts. So, check these terms before opening an account to ensure it accommodates your financial needs. While many banks also offer zero balance bank accounts, check their interest rates and other services before choosing them.
- Additional Charges: Many believe that savings accounts do not require depositors to pay any additional charges. However, that’s not true. Before opening a savings account, one must know the transaction and service charges payable to the bank. These include debit card annual charges, ATM withdrawal charges, charges for cheque books, etc. Understanding these charges clarifies additional costs and enables better money management, as they significantly affect the total interest accumulated over a year.
