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Effective Annual Interest Rate

Want to compare loans with different compounding periods? The Effective Annual Interest Rate Calculator helps you determine the true yearly cost of a loan or investment—making it easier to compare financial products accurately and confidently.




Effective Interest Rate Calculator

Rate per Compounding Interval (P): -%

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Effective Rate per Period: -%

Effective Rate for - Period(s):
-%

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What is Effective Annual Interest Rate Calculator

An Effective Annual Interest Rate (EAR) Calculator is a financial tool that calculates the actual annual interest earned or paid on a loan, credit product, or investment, after taking compounding into account. Unlike the nominal rate—which simply states the percentage charged or earned per year—the effective rate reflects the true annual cost or return, considering how frequently interest is compounded (monthly, quarterly, daily, etc.).

This tool is essential for comparing loans, mortgages, savings accounts, and other financial instruments that have different compounding intervals. It helps borrowers avoid misleading interest rate comparisons and allows investors to make smarter decisions by understanding the real rate of return.




How it works

Effective Annual Interest Rate Calculator Works

The calculator works by taking the nominal interest rate and the number of compounding periods per year to compute the effective annual rate. The basic formula it uses is:
EAR = (1 + i/n)ⁿ - 1
where i is the nominal annual interest rate and n is the number of compounding periods in a year.

Once you enter the nominal rate and choose the compounding frequency (such as monthly, semi-annually, or daily), the tool calculates the effective annual interest rate. For example, a 6% nominal rate compounded monthly actually results in a higher effective rate due to the interest-on-interest effect. This insight is especially helpful when evaluating different mortgage offers, credit card rates, or savings account returns, where the frequency of compounding plays a big role in the actual financial impact.



Frequently Asked Questions

What is the difference between nominal and effective interest rates Toggle
The nominal rate doesn’t consider compounding frequency, while the effective rate reflects how often interest is applied—giving you a more accurate annual cost or return.
Why is the effective annual rate important Toggle
It helps you compare financial products on a true apples-to-apples basis, especially when compounding intervals differ between lenders or investments.
Does compounding always increase the effective rate Toggle
Yes. The more frequent the compounding, the higher the effective interest rate will be—assuming the nominal rate stays the same
Can this calculator help with credit card debt comparisons Toggle
Absolutely. Credit card APRs often compound daily or monthly, so the effective rate gives you a clearer idea of the real cost of carrying a balance.
Is EAR the same as APR (Annual Percentage Rate) Toggle
No. APR includes fees and costs along with interest, while EAR strictly focuses on the effect of compounding on the interest rate.