# Effective Interest Rate Calculator

Our effective interest rate calculator calculates the exact effective annual interest rate on loans, saved amount in a savings account. In compound interest calculations the principal amount will increase year by year due to compound interest. Due to this interest that we are paying or getting changing. So to find the exact interest rate we need concept effective interest rate. It calculates effective interest rates annually, quarterly, monthly, daily for loans, saving amounts with formula & example.

### Effective Interest Rate Definition :

Effective interest is a method to calculate the actual interest in loan due to continuously compounded interest (nominal rate) to the principal amount. Effective annual interest rate (EAR) gives you the real interest rate that you have paid on the loan.

It calculates real interest that means in compound interest calculations we are adding annual percentage yield interest to the principal amount every year. Every year the principal amount will be changing due to the effect of compounding interest and then interest is the calculation on a principal amount. Due to continuous change in a principal amount the rate of interest also changed. The interest rate changes depend upon compounding periods per years.

### Effective interest rate formula :

r = [(1+r/100)^n]-1

Where r is effective interest rate; n = number of compounding periods in a year.

### How to calculate the effective interest rate?

To calculate the effective interest you need to know the nominal interest rate, number of times compounding in a year. We know effective interest formula then put values and calculate.

Example: Calculate EAR for 4 years for a loan at an interest rate of 10% for annual compounding.

Given data nominal rate (r) = 10%; compounding period (n) = 4 year.

### Effective interest rate formula :

r = [(1+r/100)^n]-1

r = [(1+10/100)^4]-1

r = [(1+0.1)^4]-1

r = 1.1^4-1

r = 1.4641-1

r = 0.4641

To get in percent values need multiply with 100

r = 0.4641 X 100

**Answer:**

r = 46.41%

According to the information given a rate of interest is 10% then for 4 years, it will be 10 X 4 = 40% but it is 46.41%.

### How to use effective annual interest rate calculator?

To use this application you need to follow the below instructions.

1. Open Effective Interest Rate Calculator.

2. Enter the rate of interest, compounding period in years.

3. Click on calculate to get accurate results.