1. What Is Home Loan Comparison Rate?

The effective interest rate (also known as the comparison rate) provides a more accurate measure of the true cost of a loan by accounting for compounding effects. It allows borrowers to compare different loan offers on an equal basis.

2. How Does The Calculator Work?

The calculator uses the effective rate formula:

Where:

• \( \text{nominal\_rate} \) — Stated annual interest rate (decimal)
• \( n \) — Compounding frequency per year (unitless)

Explanation: The formula converts a nominal interest rate to an effective rate that reflects the impact of compounding throughout the year.

3. Importance Of Effective Rate Calculation

Details: Calculating the effective rate is crucial for comparing different loan products with varying compounding frequencies. It helps borrowers understand the true cost of credit and make informed financial decisions.

4. Using The Calculator

Tips: Enter the nominal interest rate as a decimal (e.g., 0.05 for 5%) and the number of compounding periods per year. All values must be valid (nominal rate > 0, n ≥ 1).

5. Frequently Asked Questions (FAQ)

Q1: Why is the effective rate higher than the nominal rate?
A: The effective rate is higher due to compounding - interest earned on previously accumulated interest.

Q2: How does compounding frequency affect the effective rate?
A: More frequent compounding results in a higher effective rate, as interest is calculated and added more often.

Q3: What's the difference between APR and effective rate?
A: APR is typically a nominal rate, while the effective rate accounts for compounding and fees to show the true cost of borrowing.

Q4: When should I use this calculation?
A: Use it when comparing loans with different compounding periods or when you want to understand the true cost of a loan product.

Q5: Can this be used for investment returns as well?
A: Yes, the same formula can be used to calculate effective investment returns when compounding is involved.