Effective Interest Rate Calculator
Use our Effective Interest Rate Calculator to find the true cost of borrowing or the real return on your investment. This tool helps you calculate the Effective Annual Rate (EAR) for loans, credit cards, or savings accounts.
Effective Interest Rate Calculator
What is the Effective Interest Rate (EAR)?
The Effective Interest Rate (EAR) is the actual cost of borrowing or the real return on investments. It accounts for compounding periods, making it more accurate than the nominal rate. Banks and investors use EAR to compare loans, credit cards, and savings accounts.
How to Use the Effective Interest Rate Calculator?
- Enter the nominal interest rate.
- Input the number of compounding periods per year.
- Click “Calculate” to see the Effective Annual Rate (EAR).
Effective Interest Rate Formula
The formula to find EAR is:
EAR = (1 + i/n)ⁿ - 1
Where:
- i = Nominal interest rate
- n = Number of compounding periods per year
Examples of Effective Interest Rate Calculations
Example 1: Monthly Compounding
A loan has a 12% nominal interest rate, compounded monthly:
EAR = (1 + 0.12/12)¹² – 1 = 12.68%
This means the real interest paid is 12.68%, not 12%.
Example 2: Quarterly Compounding
A loan has a 10% nominal annual rate with quarterly compounding:
EAR = (1 + 0.10/4)⁴ – 1 = 10.38%
Why Calculate the Effective Interest Rate?
- Gives a true comparison of loans, credit cards, and investments.
- Helps you see the real cost of borrowing.
- Shows how compounding affects loan payments and savings growth.
Start Calculating Your Effective Interest Rate Today
Use our Effective Interest Rate Calculator to make smart financial choices. Whether taking a loan or investing money, knowing the real rate helps you get the best deal.