Effective Annual Interest Rate

What is an 'Effective Annual Interest Rate'
The effective annual interest rate is the interest rate that is actually earned or paid on an investment, loan or other financial product due to the result of compounding over a given time period.
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It is also called the effective interest rate, the effective rate or the annual equivalent rate.
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The effective annual interest rate is an important concept in finance because it is used to compare different products — including loans, lines of credits, or investment products like deposit certificates — that calculate compounded interest differently.
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The rate can be calculated using the following formula: