Effective Interest Rate (EAR)
See the real impact of compounding. Quoted nominal rates can be misleading; this tool reveals the true annual cost or return of your financial products.
What is the Effective Interest Rate (EAR)?
The Effective Annual Rate (EAR) is the actual interest rate an investment or loan provides after accounting for the effects of compounding over a specific period. It is also known as the Annual Percentage Yield (APY).
How does compounding frequency affect the effective rate?
The more frequently interest is compounded (e.g., daily vs. annually), the higher the effective interest rate will be. This is because interest is earned on previously earned interest more often.
What is the formula for EAR?
The formula is: EAR = (1 + i/n)ⁿ - 1, where i is the nominal annual interest rate and n is the number of compounding periods per year.
Why is EAR important for comparing loans?
Lenders often quote nominal rates, but they may have different compounding periods. EAR provides a standardized "apples-to-apples" comparison so you can see which loan is truly cheaper or which investment earns more.