Effective Annual Rate / EAR Calculator

Quickly calculate your true annual interest rate and final balance with our easy-to-use Effective Annual Rate (EAR) calculator.

What is Effective Annual Rate (EAR)?

The Effective Annual Rate (EAR) is the interest rate that you would earn or pay on an investment or loan over a year, taking into account the effect of compounding. Unlike the nominal or stated interest rate, the EAR reflects the actual growth or cost over time, making it a more accurate measure of financial performance.

Why is EAR Important?

Understanding the Effective Annual Rate helps you compare different financial products with varying compounding frequencies. For example, an investment compounded monthly will have a different EAR compared to one compounded annually, even if the stated interest rate is the same.

How to Use the EAR Calculator

Our EAR Calculator is designed to help you determine the effective annual rate based on your specified interest rate and compounding frequency. Simply enter the nominal interest rate, choose the compounding frequency, and input the term of your investment or loan. The calculator will instantly display the EAR, periodic rate, and final balance.

Example:

If you invest $10,000 at an annual interest rate of 5% with monthly compounding for 5 years, the EAR and final balance will help you understand the true return on your investment.

Related Financial Concepts

Nominal vs. Effective Interest Rates

The nominal interest rate is the rate agreed upon when signing a financial contract, while the effective interest rate accounts for the effects of compounding within the period. This difference is crucial when comparing loans or investments with different compounding frequencies.

APR vs. EAR

The Annual Percentage Rate (APR) is often confused with the Effective Annual Rate. APR represents the annual cost of a loan or the yearly return on investment, but it doesn’t account for compounding. EAR provides a more accurate representation of financial costs or gains when compounding is involved.

Frequently Asked Questions (FAQs)

1. How does compounding frequency affect EAR?

The more frequently interest is compounded, the higher the EAR will be. For instance, an investment compounded monthly will have a higher EAR than one compounded annually, even if the nominal rate is the same.

2. Can EAR be lower than the nominal interest rate?

No, the EAR is always equal to or greater than the nominal interest rate due to the effect of compounding. If there is no compounding, EAR would equal the nominal rate.

3. How does EAR apply to loans?

For loans, EAR represents the true cost of borrowing after accounting for compounding interest. It helps borrowers understand the real financial impact of a loan over time.