Steps To Calculate Effective Interest Rate On a Loan

The effective interest rate provides you the idea of actual amount one need to pay on loan. The steps to figure out effective interest rate on loan are as follows: 

  • Determine the stated interest rate : This is the nominal rate or annual percentage rate
  • Determine the number of compounding periods : This may be monthly or quarterly
  • Apply the EAR Formula: EAR = (1+ i/n)n – 1
    • where i = Stated interest rate
    • n = Compounding periods
The effective annual interest rate is also known as the effective interest rate (EIR), annual equivalent rate (AER), or effective rate. 



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