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. It provides a true comparison between financial products with different compounding periods.

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 how more frequent compounding leads to higher effective returns.

3. Importance of EIR Calculation

Details: EIR is crucial for comparing different financial products in India, as it reveals the true cost of loans or true return on investments when compounding periods vary.

4. Using the Calculator

Tips: Enter nominal rate as decimal (e.g., 0.08 for 8%), and number of compounding periods per year (e.g., 12 for monthly). Both values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: Why is EIR higher than nominal rate?
A: Because of compounding - interest earns interest, so more frequent compounding leads to higher effective rates.

Q2: How does EIR affect loans in India?
A: RBI mandates banks to disclose EIR to help borrowers compare loan products accurately, as different compounding frequencies can make significant differences.

Q3: What's typical compounding frequency in India?
A: Savings accounts typically compound quarterly, FDs may compound quarterly or monthly, while loans often compound monthly.

Q4: How to convert percentage to decimal?
A: Divide by 100 (e.g., 8% = 0.08). The calculator expects decimal input.

Q5: Does EIR account for fees?
A: No, EIR only accounts for compounding. For complete cost comparison, consider processing fees and other charges separately.