Loans & Rates

APR vs Effective Rate

Nominal APR and effective annual rate are different because of compounding frequency.

highlighted = computed this step

APR and nominal period conversion

A 12% APR is 6% per half-year if split evenly.

APR=12%,semi-year rate=6%\text{APR}=12\%,\quad \text{semi-year rate}=6\%

Effective annual rate

The effective annual rate is 12.36%, from two compounding halves.

eff=(1+6100)2−1=12.36%\text{eff}=(1+\frac{6}{100})^{2} - 1 = 12.36\%

Conventions and assumptions

Compounding more often changes the effective rate (for this same stated APR). A daily or monthly APR-to-effective conversion can be done with this same formula. Real-world disclosures follow regulation and lender policy.

(1+APR/m)m−1,conventions can vary(1+\text{APR}/m)^m - 1, \text{conventions can vary}