Enter the annual nominal rate and the number of compounding periods per year into the calculator to determine the effective interest rate.

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## Effective Interest Rate Formula

The following formula is used to calculate an effective interest rate.

ER = (1 + i/n) ^ n – 1

- Where ER is the effective interest rate
- i is the nominal interest rate
- n is the number of compounding periods per year

## Effective Interest Rate Definition

An effective interest rate is defined as the nominal rate of interest when compounded over a number of periods per year.

## Effective Interest Rate Example

How to calculate an effective interest rate.

**First, determine the nominal rate.**For this example, we will say we are looking at a credit card with a monthly nominal rate of .15 (15%).

**Next, determine the compounding periods per year.**Since the nominal rate is per month, the compounding period is 12 months per year.

**Finally, calculate the effective interest rate.**Using the formula above we find the effective rate to be (1+.15/12)^12 – 1 = .1607

## FAQ

**What is an effective interest rate?**

Effective interest is the true annual interest rate of a loan or credit based on a nominal rate and number of compounding periods per year. Interest compounds each period, so the more compounding periods the higher the effective rate will be.