what is an effective annual interest rate 
an effective annual interest rate is the real return on a savings account or any interest paying investment when the effects of compounding over time are taken into account it also reflects the real percentage rate owed in interest on a loan a credit card or any other debt it is also called the effective interest rate the effective rate or the annual equivalent rate aer theresa chiechi investopediaunderstanding the effective annual interest ratethe effective annual interest rate describes the true interest rate associated with an investment or loan the most important feature of the effective annual interest rate is that it takes into account the fact that more frequent compounding periods will lead to a higher effective interest rate 1suppose for instance you have two loans each with a stated interest rate of 10 in which one compounds annually and the other twice yearly even though they both have a stated interest rate of 10 the effective annual interest rate of the loan that compounds twice per year will be higher effective annual interest rate formulathe following formula is used to calculate the effective annual interest rate 1effective annual interest rate 1 in n 1where i nominal interest raten number of periods begin aligned effective annual interest rate left 1 frac i n right n 1 textbf where i text nominal interest rate n text number of periods end aligned effective annual interest rate 1 ni n 1where i nominal interest raten number of periods 