APR to EAR Calculator
Convert a stated APR into an effective annual rate based on compounding frequency.
What Is an APR to EAR Calculator?
This APR to EAR calculator converts an annual percentage rate into an effective annual rate by accounting for compound interest. It allows users to quickly determine the true annual cost or return of a financial product without performing manual calculations.
APR to EAR Formula
The effective annual rate reflects how often interest is compounded during the year. The formula used is:
EAR = (1 + APR / n)n − 1
In this formula, APR is expressed as a decimal and n represents the number of compounding periods per year.
Worked Example
Suppose a loan has an APR of 12% compounded monthly. First, convert the APR to a decimal (0.12) and divide it by 12. Then raise the result to the 12th power and subtract one.
The resulting effective annual rate is approximately 12.68%, which is higher than the stated APR due to compounding.
Common Use Cases
APR to EAR calculations are commonly used when comparing credit cards, personal loans, mortgages, savings accounts, and investments. They help reveal the true annual cost or yield when different compounding schedules are involved.
Limitations
This calculator assumes a fixed interest rate and consistent compounding over one year. It does not account for fees, variable rates, promotional terms, or non-standard compounding structures.
Frequently Asked Questions
How do you calculate APR to EAR manually? Divide the APR by the number of compounding periods, add one, raise it to the same power, then subtract one.
Is EAR always higher than APR? EAR is equal to APR only when interest compounds once per year; otherwise, EAR is higher.
Why does compounding frequency matter? More frequent compounding increases interest-on-interest, raising the effective annual rate.
Is APR or EAR better for comparison? EAR provides a more accurate comparison because it reflects the true annual impact of compounding.
Disclaimer: This calculator is provided for informational purposes only and does not constitute financial or legal advice.