Effective Annual Rate (EAR)

Loans & Borrowing
Updated Apr 2026 • Has calculator

The actual annual return on a loan or investment after accounting for intra-year compounding.

What is Effective Annual Rate?

The Effective Annual Rate (EAR), also called the Effective Annual Interest Rate or Annual Equivalent Rate (AER), is the true annual cost of a loan or the true annual return on an investment after compounding within the year is taken into account. Unlike the nominal APR, EAR reflects the actual amount of interest earned or paid. It is mathematically identical to APY. EAR is particularly important for credit cards, which typically use daily compounding on monthly stated rates.

Formula

EAR = (1 + Nominal Rate/n)^n − 1

Worked Example

Worked example — Credit card — typical US consumer 2024

2024

Step 1  Credit card nominal APR: 22.99% (Federal Reserve average Q4 2024)
Step 2  Compounding: daily (n = 365)
Step 3  EAR = (1 + 0.2299/365)^365 − 1
Step 4  EAR = (1.00063)^365 − 1 ≈ 25.83%
Step 5  → Carrying a $5,000 balance costs $1,291 per year, not $1,150

Source: Federal Reserve — Consumer Credit G.19, Q4 2024 (2024-11-01)

Calculate Effective Annual Rate

Stated nominal rate (e.g. credit card APR: 19.99%)

12 = monthly (most common), 365 = daily (credit cards, savings)

Effective Annual Rate

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Not investment advice.

How to Interpret Effective Annual Rate

< 5
Low — savings account or low-rate loan
5 – 10
Moderate — competitive mortgage or auto loan
10 – 20
High — personal loan or student loan territory
> 20
Very high — typical credit card; pay off ASAP

📚 DeFi Basics — Complete the path

  1. APR to APY
  2. APY to APR
  3. Effective Annual Rate
  4. DeFi APY
  5. Impermanent Loss
Sources
  1. CFA Institute — Fixed Income, 7th ed., Ch. 1
  2. Federal Reserve — Consumer Credit G.19
  3. Investopedia — Effective Annual Rate