Nominal to effective interest rate calculator
Convert a nominal rate into an effective annual rate, or the other way round, to compare savings and loans with different compounding frequencies.
Nominal to effective rate calculator: what it is and how it works
The nominal rate is the yearly percentage applied to a loan or deposit without taking into account how often interest is paid. The effective annual rate (AER, APY or EAR) shows the real return or cost over a year, assuming the interest paid is added to the balance and earns interest too.
The more often interest is compounded, the higher the effective rate for the same nominal rate. That is why the effective rate is the fair way to compare savings accounts and deposits. For loans, the official APR also includes fees; this calculator only converts the effect of compounding frequency.
How to use it
- Choose whether to convert from nominal to effective or the reverse.
- Enter the annual interest rate.
- Select how often interest is paid and read the result.
Effective = (1 + nominal ÷ f)^f − 1 · Nominal = f × ((1 + effective)^(1/f) − 1)Worked example
A deposit paying a 3 % nominal rate with monthly interest has an effective annual rate of 3.042 %. With yearly payments, both rates would be the same.
Frequently asked questions
Why is the effective rate higher than the nominal rate?
Because interest paid during the year is added to the balance and earns interest too. If interest is paid only once a year, both rates are equal.
What should I compare when choosing a loan?
The APR, because it includes compounding and, for loans, mandatory fees and charges. The lower the APR, the cheaper the loan.
And for savings?
The AER: it shows the real annual return. Between two accounts with the same nominal rate, the one that compounds more often pays more.
Does this include fees?
No. It converts rates according to compounding frequency only. For the APR of a loan with an arrangement fee, use the loan calculator.