What Is the Effective Interest Rate?
The video defines it as the yearly rate you actually pay once the timing of interest, and often fees, are counted in.
Video coming soon. The lesson video will appear here once it is published on YouTube.
Check yourself: sample questions
Think about each question, pick what you would answer if you like, then select “Show answer” to see the solution and why. Nothing is graded or sent to us. Example numbers are worked examples, not predictions.
1.What does the effective interest rate show?
The video defines it as the yearly rate you actually pay once the timing of interest, and often fees, are counted in.
2.What is the nominal rate?
The 12 percent in the ad is the nominal rate; 12 times 1 percent is 12 percent without compounding.
3.Marge borrows 1,000. Offer A charges 12 percent once at year end; Offer B charges 1 percent a month. Which costs more interest?
Each month's interest is added to the balance, so Offer B costs 1,000 times 1.01 to the power of 12, which is 1,126.83 (worked example).
Full course: 5 more questions for this lesson
The full course unlocks all self-check questions of all 365 lessons, the daily plan, your progress and the printable learning record. Lessons 1 to 7 are completely free.
See the full course Start the free week
Already bought? Open the course on this device
Sources (4)
- CFPB: What is the difference between a mortgage interest rate and an APR?
- Directive 2008/48/EC (Verbraucherkreditrichtlinie), Annex I Part I: Calculation of the annual percentage rate of charge (Fassung auf legislation.gov.uk)
- Eigene Berechnung: effektiver Jahreszins aus nominalem Satz
- Eigene Berechnung Gebuehrenbeispiel (Python)
Related lessons
Education only. Not financial advice.