Effective Interest Rate Calculator
Turn a nominal rate into its true effective annual rate under any compounding schedule.
What the Effective Interest Rate Calculator does
The effective annual rate converts any compounding schedule into a single comparable yearly figure. It is the only honest way to compare a monthly-compounding loan against a quarterly-compounding one.
Formula
EAR = (1 + r/n)ⁿ − 1Continuous: EAR = eʳ − 1
Inputs explained
| Input | Unit | Required | Notes |
|---|---|---|---|
| Nominal annual rate | % | Yes | — |
| Compounding frequency | one of 8 options | Yes | — |
How to use it
- Choose Compounding frequency.
- Enter Nominal annual rate.
- Select Calculate.
Worked example
A credit card charges 18% nominal, compounded monthly.
- Rate
- 18
- Frequency
- Monthly
EAR = (1 + 0.18/12)¹² − 1 = 19.56%, noticeably above the headline rate.
Reading the result
- The effective rate is what the nominal rate actually costs or earns once compounding is counted. A nominal 12% compounded monthly is an effective 12.68%.
- Two offers can only be compared honestly on effective rates. A lower nominal rate compounded more often can cost more than a higher one compounded annually.
Assumptions and limitations
- The rate is treated as fixed for the year and no fees are included. A quoted APR usually folds in charges, so it will exceed the effective rate computed from interest alone.
Common mistakes
- Comparing a nominal rate against an effective one, which flatters whichever product quoted the nominal figure.
- Assuming continuous compounding is far ahead of daily. At 12% the gap between them is under a hundredth of a percentage point.
Frequently asked questions
Why do lenders quote nominal rates?
Because they are lower. A card advertising 18% is really charging 19.56% a year once monthly compounding is counted.