Effective Interest Rate Calculator
Enter the annual interest rate and compounding frequency to compute the periodic rate and effective interest rate (EAR).
Effective Interest Rate Calculator
When comparing loans, mortgages, or investments, the nominal interest rate alone doesn’t tell the full story. What truly matters is the Effective Interest Rate (EIR), also called the Effective Annual Rate (EAR). This rate reflects the real cost of borrowing or the actual return on an investment once compounding is factored in.
Our Effective Interest Rate Calculator helps you easily determine both the periodic interest rate and the effective interest rate based on the annual interest rate and compounding frequency.
🔎 What is Effective Interest Rate (EIR)?
The Effective Interest Rate is the actual interest paid (or earned) over a year after considering the effects of compounding. It’s always equal to or greater than the nominal rate, depending on how frequently compounding occurs.
👉 Formula for Effective Interest Rate (EIR):EIR = (1 + (i ÷ n))^n – 1
Where:
• i = Nominal annual interest rate
• n = Number of compounding periods per year
🔎 What is the Periodic Interest Rate?
The Periodic Interest Rate is simply the annual rate divided by the number of compounding periods. For example, a 12% annual rate compounded monthly results in a periodic rate of 1% per month (12 ÷ 12).
📚 Examples with Different Compounding Frequencies
Annual Compounding (1/yr)
Annual Interest Rate: 12%
Compounding: Once a year
Periodic Rate = 12 ÷ 1 = 12%
EIR = (1 + 0.12 ÷ 1)^1 – 1 = 12%
✅ Periodic Rate = 12% , Effective Interest Rate (EAR) = 12%Semi-Annual Compounding (2/yr)
Annual Interest Rate: 10%
Compounding: Twice a year
Periodic Rate = 10 ÷ 2 = 5%
EIR = (1 + 0.10 ÷ 2)^2 – 1 = 10.25%
✅ Periodic Rate = 5% , Effective Interest Rate (EAR) = 10.25%Monthly Compounding (12/yr)
Annual Interest Rate: 8%
Compounding: 12 times a year
Periodic Rate = 8 ÷ 12 = 0.666667% per month
EIR = (1 + 0.08 ÷ 12)^12 – 1 = 8.30%
✅ Periodic Rate = 0.66% , Effective Interest Rate (EAR) = 8.30%Weekly Compounding (52/yr)
Annual Interest Rate: 15%
Compounding: 52 times a year
Periodic Rate = 15 ÷ 52 ≈ 0.288462% per week
EIR = (1 + 0.15 ÷ 52)^52 – 1 = 16.16%
✅ Periodic Rate = 0.29% , Effective Interest Rate (EAR) = 16.16%✨ Features of Our Effective Interest Rate Calculator
👩💼 Who Should Use This Calculator?
• Borrowers & Homeowners – To evaluate the true cost of loans and mortgages
• Investors & Traders – To compare bonds, deposits, and savings accounts
• Financial Analysts & Planners – To assess borrowing and lending performance
• Students & Educators – To learn how compounding impacts finance
• Business Owners – To make smarter financing decisions
🌍 Practical Applications of Effective Interest Rate
• Loan Comparisons: Determine which lender offers the best real cost.
• Mortgage Planning: Understand how compounding affects long-term payments.
• Savings & CDs: Compare bank products with different compounding schedules.
• Bond & Investment Analysis: Calculate actual returns for portfolio decisions.
• Education & Training: Simplify financial concepts for learners.
✅ The Effective Interest Rate Calculator is an essential tool for anyone dealing with loans, investments, or financial planning. Whether you’re a student, investor, analyst, or borrower, this calculator ensures you always know the true cost or return behind any nominal rate.
👉 Try the Effective Interest Rate Calculator today on Hive Calculator and make smarter financial decisions with confidence!