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What is the formula for the effective interest rate?

The effective interest rate is the rate that is often preferred for amortization purposes. It effectively represents the real charge associated with a lending agreement subsequent to related fees. The effective interest rate is computed as follows:

Below is an example of how the effective interest rate is calculated based on the loan amount and the stated interest rate:

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  • What is the stated interest rate and how is it calculated?

    The stated interest rate, which is also known as the nominal interest rate, will represent the rate of interest that has been charged prior to any adjustments for compounding market factors. The stated interest rate will be the rate displayed on the loan agreement.