Effective Annual Rate (EAR) Calculator
Our easy-to-use Effective Annual Rate (EAR) Calculator helps you understand the actual cost of borrowing by computing the annual interest rate on loans and investments.
Effective Annual Rate Formula
EAR = (1 + (nominal interest rate / m))^m - 1 Where: m = number of compounding periods per year nominal interest rate = stated interest rate as a decimal
Effective Annual Rate Calculation
Let's say you take out a loan with a nominal interest rate of 10% per year, compounded monthly. To find the Effective Annual Rate (EAR), you would use the formula:
EAR = (1 + (0.10 / 12))^12 - 1 EAR = 0.1047 or 10.47%
So the Effective Annual Rate on this loan is 10.47%. This means that you'll actually pay more than 10% interest over the course of a year due to the effect of compounding.
APR vs EAR: What's the Difference?
When you're shopping for a loan or credit card, you'll often see two different interest rates: the Annual Percentage Rate (APR) and the Effective Annual Rate (EAR). While both rates represent the cost of borrowing, they are calculated differently.
APR represents the annual percentage rate you'll pay on your loan, including any fees or charges. However, APR doesn't take into account the effects of compounding, which can significantly increase the amount you'll pay over time.
On the other hand, EAR is the true annual interest rate you'll pay on a loan, taking into account the effects of compounding. It gives you a more accurate picture of the total cost of borrowing.
So, when you're comparing loans, it's important to look at both the APR and the EAR to get a complete understanding of the costs involved. Keep in mind that the EAR will always be higher than the APR, due to the effects of compounding.
Understanding the difference between APR and EAR can help you make more informed financial decisions and avoid any surprises down the road.
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