GenzeeEffective Annual Rate (EAR) Calculator
Convert a nominal (stated) annual interest rate into its true effective annual rate, accounting for how often it compounds.
Effective annual rate
12.683%
vs. the stated 12% nominal rate
Nominal rate vs. effective rate
The nominal rate is the stated annual interest rate before accounting for compounding — the number usually advertised. The effective annual rate (EAR) accounts for how often interest compounds within the year, and is always equal to or higher than the nominal rate whenever compounding happens more than once a year, since each compounding period earns interest on interest already accrued.
Why compounding frequency matters
A 12% nominal rate compounded monthly doesn't simply mean 12% a year — it means 1% is applied each month, and each month's interest itself starts earning interest for the rest of the year. Run through the math and a 12% nominal rate compounded monthly works out to roughly 12.68% effectively — a small-looking gap that grows more significant at higher rates or more frequent compounding.
Why this matters for comparing offers
Two loans or savings products quoting the same nominal rate can have meaningfully different real costs or returns if they compound at different frequencies. Comparing the effective annual rate, rather than the advertised nominal rate, is the only way to fairly compare products that compound differently — this is exactly why regulators in many countries require lenders to disclose an effective or "annual percentage rate" figure alongside any nominal rate.
Frequently asked questions
Is effective rate always higher than nominal rate?
Yes, whenever compounding happens more than once a year — the two are only equal when compounding is exactly annual. More frequent compounding always produces a higher effective rate for the same nominal rate.
Which rate do lenders usually advertise?
It varies — some advertise the nominal rate (which looks lower), others the effective rate. Always check which one is quoted, and use this calculator to convert between them for a fair comparison across offers.
Does this apply to both loans and savings?
Yes — the same math applies whether interest is being paid to you (savings, investments) or charged to you (loans, credit cards). A higher effective rate is good news for a saver and bad news for a borrower.