Guide
Effective Annual Rate (EAR) Explained
EAR shows the true annual rate after compounding. Here’s a quick definition, a 5% example, and how to test it in the calculator.
Published: March 12, 2025 · Updated: December 21, 2025 · By FinToolSuite Editorial
Try the calculator
Enter a nominal rate, switch compounding frequency, and see how EAR/APY moves.
Open the calculatorQuick answer
EAR is the annual rate after compounding. When interest compounds more than once a year, EAR is usually higher than the nominal rate. See the APR vs APY view here: APR vs APY explained.
Disclaimer
Educational purposes only; not financial advice. Examples are illustrative; real returns vary and investments can go down as well as up. Fees, taxes, inflation, and rules vary by provider and country.
What EAR means
Nominal rate: the stated annual rate. EAR: the effective rate after applying compounding within the year. In many savings contexts, APY is the same idea as EAR.
Small worked example
Nominal rate: 5%, compounding monthly (n = 12). Principal: £1,000.
- Monthly rate: 0.05 / 12
- EAR/APY ≈ 5.12%
- End of year balance: ~£1,051.20 (rounded)
Frequency comparison (5% nominal)
| Frequency | n | EAR/APY (approx.) | Ending balance on £1,000 (1 yr) |
|---|---|---|---|
| Yearly | 1 | 5.00% | ~£1,050.00 |
| Monthly | 12 | ~5.12% | ~£1,051.20 |
| Daily | 365 | ~5.13% | ~£1,051.27 |
Note: monthly vs daily is a small difference; compounding frequency modestly raises EAR.
How to use EAR in the calculator
Many tools take a nominal rate and a compounding frequency. Keep the nominal rate the same, change frequency, and see how the effective growth changes. You can compare yearly vs monthly vs daily to see the EAR effect.
Open the calculatorCommon misconceptions
- EAR and APR are the same: only if compounding is annual and there are no fees.
- Daily compounding is dramatic: it’s usually a small lift over monthly.
- APY is different from EAR: APY is often just EAR in savings contexts.
FAQ
What is effective annual rate?
It’s the annual rate after compounding within the year.
Is EAR the same as APY?
Often yes for savings: APY is an effective annual rate that includes compounding.
Why is EAR higher than the nominal rate?
Because compounding adds interest multiple times a year, boosting the effective annual rate.
Does compounding frequency affect EAR?
Yes. More frequent compounding raises EAR slightly for the same nominal rate.
How do I calculate EAR?
Use (1 + r/n)^(n) − 1 for a yearly figure, where r is nominal and n is compounds per year.
Should I use EAR or APR in a calculator?
If the calculator takes nominal rate plus frequency, enter the nominal rate and set the frequency. EAR is the outcome after compounding.
Does EAR apply to loans and savings?
Yes. It shows the effective rate after compounding for either context.
Why do providers quote different numbers?
They may use different compounding schedules, include fees differently, or show APR vs APY/EAR.
Compare yearly vs monthly vs daily
Use the same nominal rate and switch compounding to see how EAR shifts.
Open the calculator