What is the Effective Interest Rate?

The effective rate is the interest rate you actually pay or receive, as opposed to the stated rate. For example, an 8% stated rate paid annually on a $1,000 investment is $80 per year. However, if interest is paid quarterly, you will receive $82.40 a year. So, the effective annual rate is 8.24% per year. Read the fine print, where effective rates are generally disclosed. (more…)