The effective annual rate (EAR) or effective interest rate is the real rate of return on a loan or investment product as a result of compounding the interest over a given period of time. It takes into consideration the effects of compounding periods on balance and shows the actual growth of the balance for a year.
The periodic interest rate shows the real interest rate of the particular compounding periods (like monthly, quarterly). Let's take an example assume you take a loan with an 8% nominal (annual) interest rate and your interest is calculated and added quarterly, your periodic interest rate is 2% (8% / 4 = 2%), and compounding occurs four times.
The number of compounding periods is increasing makes EAR increased. The effective annual rate is usually higher than the annual (or nominal) interest rate because it takes the effects of compounding. If the compounding period is yearly then the effective annual rate is equal to the annual interest rate.
The Formula for calculating Equivalent Annual Rate (EAR) is as follows:
EAR = (1 + R / CF)(CF) - 1
- EAR - effective annual rate or effective interest rate
- R - annual interest rate which is the nominal interest rate
- CF - compounding periods or the number of times compounding happens in a year.
What can you do with EAR Calculator?
- It helps to calculate the EAR rate and helps to project your future interest earnings on investment and pay a loan
- Users can see the accurate value of the final balance, interest, EAR, and periodic interest rate. And also can see the final balance in words.
- The chart represents the growth of the total amount and initial amount by the scale of two years.
- Users can easily see their calculations in detail by the table. Based on the selected compound frequency table describes the opening balance, your earned interest, closing balance and period.
- This calculator helps to share your calculations by URL.