A 12% nominal rate compounded monthly is an effective annual rate of 12.68%. On $10,000 that is $1,268 of interest in a year, $68 more than the 12% headline suggests.
Same headline, different cost
The nominal rate is the quoted yearly rate before compounding. The effective annual rate (EAR) is what you actually pay or earn over a year once interest compounds.
The more often interest compounds, the higher the EAR: 12.00% yearly, 12.68% monthly, 12.75% daily, all from the same 12% nominal.
Comparing offers
Two loans with the same nominal rate are not equal if they compound differently. Compare the EAR, or the APR where a lender must disclose one, and read what the APR includes: in many places it also counts certain fees, which EAR does not.
Try your own rate
Enter a nominal rate and a compounding frequency in the effective annual rate calculator to get the EAR directly.
| Compounding periods a year | Effective rate |
|---|---|
| 1 | 12.00 % |
| 4 | 12.55 % |
| 12 | 12.68 % |
| 365 | 12.75 % |
FAQ
Is APR the same as EAR?+
Not always. APR is a disclosure measure that may include fees and may not reflect compounding; EAR reflects compounding only.
Which rate should I compare?+
Compare effective rates for the same term, and compare total cost when fees differ.