Effective Interest Rate Formula

Let us review what the effective interest rate is before learning the effective interest rate formula. The effective interest rate is the interest rate that a borrower actually pays on a loan, credit card, or any other type of debt. It is also the real interest rate on a savings account when compounding effects are taken into account. It's also known as the market interest rate or the yield to maturity. It's also known as the annual equivalent rate or the effective rate. More Maths Formulas on the parent's page.

After compounding, the effective interest rate is the overall interest rate that an investor (or borrower) can obtain (or pay) in a year. The effective interest rate formula is as follows:

r = (1 + i/n)ⁿ -1

Where,

r = The effective interest rate
i = The stated interest rate
n = The number of compounding periods per year

Effective Interest Rate Formula