Effective Annual Rate (EAR) Calculator
The effective annual rate calculator converts a nominal, or stated, annual interest rate into the true rate you actually pay or earn once compounding is taken into account. You enter the nominal annual rate and the number of times interest compounds each year, monthly, quarterly, daily or any other frequency, and the tool returns the effective annual rate (EAR) as a percentage. The reason this matters is that two loans or investments quoting the same headline rate are not equal if one compounds more often, because interest charged on interest builds up faster with more frequent compounding. The EAR puts every rate on the same yearly basis so you can compare them fairly. Borrowers use it to understand the real cost of credit cards, loans and finance deals, while savers and investors use it to see the genuine return on term deposits and other interest bearing accounts. To use the calculator well, enter the nominal rate exactly as it is quoted and match the compounding periods to how the product actually works, for example 12 for monthly, 4 for quarterly or 365 for daily. The EAR will always be equal to or higher than the nominal rate, and the gap widens as the rate or the compounding frequency increases. Keep in mind that EAR captures compounding but not fees, so for a complete picture of borrowing cost you should also factor in establishment and ongoing charges. When comparing offers, line up their effective annual rates rather than their advertised nominal rates, and you will quickly see which deal truly costs less or pays more across a full year.
EAR = (1 + i/n)^n - 1, where i is the nominal rate and n is the periods per year. Estimate only, not financial or tax advice.
How it works
The effective annual rate is found by dividing the nominal rate by the number of compounding periods, adding one, raising that to the power of the number of periods, then subtracting one. More frequent compounding lifts the effective rate above the nominal rate.
Worked example
With a nominal rate of 6 percent compounding monthly, i over n is 0.06 divided by 12, which is 0.005. Adding one gives 1.005, and raising that to the power of 12 gives about 1.0617. Subtracting one leaves 0.0617, so the effective annual rate is 6.17 percent.
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- Term Deposit Break Cost Calculator: cost of breaking early.
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