1. What is the 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 Australia, this is particularly important for comparing different financial products.

2. How Does the Calculator Work?

The calculator uses the EIR 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 or return of a financial product.

3. Importance of EIR Calculation

Details: EIR is crucial in Australia for comparing loans, savings accounts, and investments with different compounding frequencies. It's required by law to be disclosed for financial products.

4. Using the Calculator

Tips: Enter the nominal rate as a decimal (e.g., 5% = 0.05) and the number of compounding periods per year (e.g., monthly = 12, quarterly = 4).

5. Frequently Asked Questions (FAQ)

Q1: Why is EIR different from the nominal rate?
A: EIR includes the effect of compounding, making it higher than the nominal rate for investments and lower for loans with frequent compounding.

Q2: How does this apply to Australian financial products?
A: Australian lenders must disclose EIR (called Comparison Rate) to help consumers compare products accurately.

Q3: What's typical compounding frequency in Australia?
A: Savings accounts often compound daily, while loans typically compound monthly.

Q4: Does EIR account for fees?
A: No, this calculation doesn't include fees. The Australian Comparison Rate does include some fees.

Q5: How is EIR used in mortgage comparisons?
A: Australian lenders must provide a Comparison Rate that includes EIR plus certain fees, making mortgage comparisons easier.