Four ways to state the same loan
- Monthly rate — what is actually charged on the balance each month. Every other rate is derived from it.
- Nominal annual rate — the monthly rate × 12, with no compounding. 1 % a month is 12 % nominal.
- Effective annual rate — the monthly rate compounded over twelve months. 1 % a month is 12.68 % effective. It is always the higher of the two when there is interest.
- APR — the annual percentage rate US lenders must disclose. It is quoted the nominal way (periodic rate × 12), but it is calculated on the cost of credit, including certain fees, not only the interest.
Nominal to effective, side by side
| Nominal annual | Monthly | Effective annual |
|---|---|---|
| 4 % | 0.33 % | 4.07 % |
| 6 % | 0.50 % | 6.17 % |
| 8 % | 0.67 % | 8.30 % |
| 10 % | 0.83 % | 10.47 % |
| 12 % | 1.00 % | 12.68 % |
| 15 % | 1.25 % | 16.08 % |
| 18 % | 1.50 % | 19.56 % |
When APR and interest rate are the same
If the loan has no fees counted as finance charges, the APR equals the nominal interest rate. They come apart when there are such fees: the APR treats them as part of the cost of borrowing, so it ends up above the interest rate.
Example: $20,000 borrowed for 60 months at 7 % with a $500 fee added to the loan. The payment is calculated on $20,500 and comes to $405.92. Measured against the $20,000 you actually received, those payments imply an APR of 8.04 % — higher than the 7 % rate on the paper.
Which one should you compare?
Compare like with like. Two offers quoted as APRs can be compared directly, and APR is the figure that captures fees. If one offer gives you only a payment, work its rate out with «Find the rate» — the result is a nominal annual rate, directly comparable with an APR when no fees are involved. Our calculator also shows the effective rate, which is handy when an offer quotes interest the compounded way.