APR on Bank Bonuses
Please settle an argument: I say APR refers to the actual interest rate on funds left on deposit for 1 year. For example, if a bank pays a one-time $450 bonus for opening a new account and leaving $1,000 on deposit for 1 year, the APR would be 45%. If the same $450 bonus is paid on $1,000 left on deposit for only 6 months, I say the APR would still be 45%, because no interest is paid for months 7 through 12. My friend insists the APR would be 90%, based on the general formula APR = Interest/principal X number of 1-year periods ($450/$1000 X 0.5 years). But I argue that the formula assumes you would get $900 interest if you left $1,000 on deposit for 1 full year, which is impossible under the bank’s bonus rules. Your thoughts?
Terry Says
You are BOTH confusing Annual Percentage Rate with Annual Percentage YIELD!!
The rate paid on the deposit does not include the bonus, nor should it, since this is a one-time payment. (Beware of strings attached, such as requirements that tie up your money for longer than one year if you accept the bonus payment!)
This is such a confusing and complicated topic that I suggest you read this excellent article from Investopedia –explaining APR on both loans and deposits. APR is a term of law.
