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Effective Annual Rate Formula:
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The Effective Annual Rate (AER) or Annual Equivalent Rate represents the actual annual interest rate when compounding is taken into account. It provides a more accurate measure of the true cost of borrowing for car loans compared to the nominal interest rate.
The calculator uses the AER formula:
Where:
Explanation: The formula accounts for the effect of compounding interest, showing the actual annual rate you'll pay on your car loan.
Details: Understanding the effective annual rate is crucial for comparing different car loan offers, as loans with the same nominal rate but different compounding frequencies can have significantly different actual costs.
Tips: Enter the annual interest rate as a percentage (e.g., 5.25 for 5.25%) and the number of times interest is compounded per year. All values must be positive numbers.
Q1: Why is AER different from the nominal rate?
A: AER accounts for compounding effects, while the nominal rate does not. The more frequently interest compounds, the higher the AER will be compared to the nominal rate.
Q2: How often is interest typically compounded for car loans?
A: Most car loans compound interest monthly (n=12), but some may compound quarterly (n=4) or semi-annually (n=2).
Q3: Should I always choose the loan with the lowest AER?
A: Generally yes, but also consider other factors like loan term, fees, prepayment penalties, and your overall budget.
Q4: Does AER include additional fees and charges?
A: No, AER only reflects the interest rate with compounding. Always check for additional fees that may affect the total cost of the loan.
Q5: How can I reduce the effective interest rate on my car loan?
A: You can make larger down payments, improve your credit score, shop around for better rates, or choose a shorter loan term.