Effective interest rate

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Igor Seredjuk


Created: 2015-12-08 14:52:36, Last updated: 2021-03-20 19:54:08
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Comparing the profitability of deposits when accruing the simple interest is easy - compare the value of the nominal interest rate. It's harder with compound interest as the interest periods for different banks may vary.

For example, what is more profitable - to put the contribution at 10% with monthly interest, or 11% with the semiannual? To answer that, nominal interest rates are deduced to the effective interest rate.

Effective percent rate is referred to the amount of interest rate when accruing percentage annually, which gives the same amount, accrued as of the nominal interest rate with its own accrual period. The deductions of the bank nominal rates with the calculation periods to the effective rates allow us to compare them.

Note that there is another concept of the effective interest rate among the people, especially when talking about credits, but this is a bit different - here accreted amount is corrected (the amount you have to return to the bank by the loan agreement) by adding additional expenses for servicing the loan (insurance, cashing percentage, etc.). This increased accreted amount is used to recalculate the interest rate, which is, of course, what happens to be bigger.

When the banks say about the effective interest rate, the deduction is commonly used rather than the popular concept.

PLANETCALC, Effective interest rate

Effective interest rate

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PLANETCALC, Effective interest rate