Key Takeaways
- EAR (Effective Annual Rate) shows the true annual interest including compounding effects
- A 5% nominal rate compounded monthly equals a 5.12% EAR
- More frequent compounding = higher effective rate
- APY (Annual Percentage Yield) is the same as EAR - used for savings accounts
- Always compare EAR/APY when evaluating loans or savings accounts
About the Effective Interest Rate Calculator
The Effective Interest Rate Calculator helps you understand the true cost of borrowing or the real return on your savings. While banks often advertise nominal (stated) interest rates, the effective rate accounts for the impact of compounding, giving you a more accurate picture of what you'll actually pay or earn.
Understanding the Formula
EAR = (1 + r/n)n - 1
This formula calculates how much more you earn (or pay) when interest is compounded multiple times per year compared to simple interest. The more frequently interest compounds, the higher the effective rate.
Real-World Examples
5% Nominal Rate - Compounding Comparison
On a $10,000 balance, daily compounding earns $13 more per year than annual compounding.
How to Use This Calculator
- Enter the nominal (stated) interest rate in the first field
- Select how often the interest compounds (monthly, daily, etc.)
- Click "Calculate" to see the effective annual rate
- Compare the difference to understand the compounding effect
EAR vs APR vs APY - What's the Difference?
APR (Annual Percentage Rate): The stated nominal rate without considering compounding. Used for loans and credit cards.
EAR (Effective Annual Rate): The true annual rate including compounding effects. This is what you actually pay on loans.
APY (Annual Percentage Yield): Same as EAR, but used for deposit accounts. This is what you actually earn on savings.
Why This Matters
Understanding effective interest rates is crucial for making informed financial decisions. A credit card with a 24% APR actually costs 26.82% when you account for daily compounding. Similarly, choosing a savings account with 4.50% APY over one with 4.40% APY could mean earning an extra $100+ per year on a $10,000 balance.
Frequently Asked Questions
Yes, this calculator is completely free to use with no hidden charges or registration requirements.
The calculator uses the standard mathematical formula for effective interest rate and provides highly accurate results. However, always consult with a financial professional for important decisions.
EAR and APY are mathematically the same - both represent the true annual rate including compounding. APY is typically used for deposit/savings accounts, while EAR is used for loans and investments.
When interest compounds more than once per year, you earn interest on previously earned interest. This compounding effect causes the effective rate to be higher than the nominal rate. The more frequently interest compounds, the larger this difference becomes.
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