1. What is Effective Interest Rate?

The effective interest rate (EIR) is the actual interest rate that an investor earns or a borrower pays after accounting for compounding over a given period. In Singapore, this is particularly important for comparing different loan or investment products.

2. How Does the Calculator Work?

The calculator uses the effective interest rate formula:

Where:

• \( i \) — Nominal interest rate (in decimal form)
• \( n \) — Number of compounding periods per year

Explanation: The formula accounts for the effect of compounding, showing the true cost of borrowing or true return on investment.

3. Importance of Effective Rate Calculation

Details: In Singapore's financial market, understanding EIR is crucial for comparing loans, credit cards, and investment products that may have different compounding frequencies.

4. Using the Calculator

Tips: Enter the nominal annual interest rate in decimal form (e.g., 0.05 for 5%) and the number of compounding periods per year (e.g., 12 for monthly compounding).

5. Frequently Asked Questions (FAQ)

Q1: Why is effective rate different from nominal rate?
A: The effective rate includes compounding effects while the nominal rate does not. More frequent compounding leads to higher effective rates.

Q2: How is this relevant in Singapore?
A: Singapore financial regulations require disclosure of EIR for transparency in loan and credit products.

Q3: What are typical compounding periods?
A: Common periods are annual (1), semi-annual (2), quarterly (4), monthly (12), or daily (365).

Q4: Does this apply to savings accounts?
A: Yes, banks in Singapore often quote nominal rates, but your actual return depends on compounding frequency.

Q5: How does this affect loan comparisons?
A: Loans with the same nominal rate but different compounding will have different actual costs - always compare EIR.