Effective Interest Rate Calculator
Calculate the effective interest rate (EIR) to find the true cost of borrowing. EIR shows the actual annual interest rate when fees, compounding, and other charges are included.
Effective Interest Rate Results
Loan Comparison
Add loan options above to see comparison
Typical Effective Rates (2024)
Credit Cards: 15-25% EIR
Personal Loans: 10-20% EIR
Auto Loans: 5-12% EIR
Note: Rates vary by credit score and lender
Understanding Effective Interest Rate (EIR)
Effective Interest Rate (EIR) represents the true annual cost of borrowing when compounding and fees are taken into account. It shows what you actually pay over a year, making it easier to compare different loan and credit products.
EIR Formula
The formula for calculating EIR is:
EIR = (1 + r/n)^n - 1
Where: r = nominal annual rate, n = number of compounding periods per year
EIR vs. Nominal Rate
| Aspect | Nominal Rate | Effective Interest Rate |
|---|---|---|
| What it shows | Stated annual rate | True annual cost with compounding |
| Compounding effect | Ignores compounding | Includes compounding effect |
| Comparison tool | Limited usefulness | Best for accurate comparisons |
| Always true | EIR = Nominal Rate | When compounding occurs |
Impact of Compounding Frequency
More frequent compounding results in higher EIR. The difference becomes more significant with higher nominal rates.
| Compounding | 15% Nominal Rate | 25% Nominal Rate |
|---|---|---|
| Annually | 15.00% | 25.00% |
| Quarterly | 15.87% | 27.14% |
| Monthly | 16.08% | 27.73% |
| Daily | 16.18% | 27.95% |
EIR in Different Products
- Credit Cards: Shows true borrowing cost (APR to EIR)
- Personal Loans: Reveals actual loan cost
- Auto Loans: Compares different financing options
- Mortgages: Helps compare mortgage products
- Business Loans: Evaluates financing alternatives
Regulatory Requirements
Many countries require lenders to disclose EIR alongside nominal rates to ensure consumers understand the true cost of borrowing.
- Truth in Lending Act (US): Requires EIR disclosure for consumer loans
- Consumer Credit Directive (EU): Mandates EIR disclosure
- Credit CARD Act: Requires clear interest rate disclosure
- Banking Regulations: EIR disclosure for loans and credit products
Practical Examples
Credit Card Example
Credit card with 20% APR compounded monthly:
- Nominal Rate: 20%
- EIR: (1 + 0.20/12)^12 - 1 = 21.94%
- True annual borrowing cost is 21.94%
Personal Loan Example
Loan with 12% nominal rate compounded monthly:
- Nominal Rate: 12%
- EIR: (1 + 0.12/12)^12 - 1 = 12.68%
- You pay 12.68% effective annual interest
When EIR Matters Most
- High Nominal Rates: Larger difference between nominal and EIR
- Frequent Compounding: More compounding periods increase EIR
- Long Borrowing Periods: Compounding effect grows over time
- Multiple Options: Comparing different loan products
- Cost of Borrowing: Understanding true cost of credit
EIR vs. APR
APR (Annual Percentage Rate) and EIR are closely related concepts. APR represents the nominal annual rate, while EIR shows the effective annual rate when compounding is considered. In many contexts, they are used interchangeably, but EIR is more precise.
Tip: Always calculate EIR when comparing different borrowing options. The nominal rate alone can be misleading, especially for products with different compounding frequencies. EIR gives you the true annual cost of borrowing, helping you make better financial decisions.