Effective Interest Rate Calculator
Calculate the effective annual rate (EAR) from a nominal interest rate and compounding frequency (monthly, quarterly, daily, and more).
%
Compounding Frequency
Effective Annual Rate (EAR)
6.168%
Difference from Nominal Rate
+0.168%
How Effective Interest Rate Is Calculated
The effective annual rate (EAR) shows the true annual interest rate once compounding within the year is taken into account. A nominal rate of 6% compounded monthly earns more than 6% over a year, because each month's interest itself starts earning interest.
Where r = nominal annual rate, n = number of compounding periods per year
Example
A nominal annual rate of 6% compounded monthly (n = 12) gives an EAR of (1 + 0.06/12)^12 − 1 ≈ 6.17%. The more frequently interest compounds, the larger the gap between the nominal rate and the effective rate.
Common Use Cases
- Comparing loan or savings account offers that compound at different frequencies.
- Understanding the true cost of a credit card's daily-compounding APR.
- Evaluating the real return on a certificate of deposit or savings bond.
- Converting between nominal and effective rates for financial modeling.
FAQs
Why is EAR always higher than the nominal rate?
Because compounding means interest is calculated on previously earned interest as well as the principal. The more frequently that happens within a year, the more the effective rate exceeds the stated nominal rate.
Does compounding frequency matter a lot?
The difference shrinks as compounding gets more frequent — going from monthly to daily compounding makes a much smaller difference than going from annual to monthly. Beyond daily compounding, the rate approaches (but never quite reaches) continuous compounding.
Should I compare loans using nominal or effective rate?
Always compare effective annual rates when evaluating loans or investments with different compounding frequencies — it's the only way to see the true apples-to-apples annual cost or return.