wikiHow Effective Interest Rate Calculator The effective interest rate is the actual interest rate that you will pay or earn on a loan or investment after taking into account compounding. The formula for calculating the effective interest rate is: Effective Interest Rate = (1 + (Annual Interest Rate / n))^n - 1 where: * Annual Interest Rate is the stated interest rate per year (as a decimal) * n is the number of compounding periods per year For example, if a loan has an annual interest rate of 5% and compounds monthly (i.e., n = 12), the effective interest rate would be: Effective Interest Rate = (1 + (0.05 / 12))^12 - 1 Effective Interest Rate = 0.0511618988 or 5.12% Here's an example of how to use the formula to calculate the effective interest rate: Let's say you have a loan with an annual interest rate of 6%, and the interest is compounded quarterly. To calculate the effective interest rate, you would use the following formula: Effective Interest Rate = (1 + (0.06 / 4))^4 - 1 Effective Interest Rate = 0.061678899 or 6.17% So the effective interest rate on this loan is 6.17%. Page