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# What is the effective interest rate?

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20th Dec 2009 by Burt Carlson

This is the rate that determines your payment on anything you are financing. It is NOT the total cost of credit to you. The total cost of credit includes any extra fees or costs. For example, the rate on a credit card might be 18% but say there is an annual fee of \$100. This fee increases the rate on your card but not the effective rate since it has no bearing on your payment.

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com
6th Dec 2009 by Tom Lindmark

The effective interest rate could be a lot of things but the best way to think about it is to view an effective interest rate as the rate you are paying after you add or subtract anything that adds to or decreases the amount of money you are paying on the loan. For instance, if you get a loan from a bank and they charge you a 10% interest rate on a loan of say \$1000 but they also charge you a fee of 1% for the loan then your effective interest rate is actually 11%. That's because you will have to pay \$100 in interest and \$10 for the fee bringing your cash out of pocket to \$110 for the \$1000 loan. \$110 divided by \$1000 equates to an 11% interest rate. The way to figure this out is to use the formula for calculating interest on a loan. It is PxRXT=I, where P stands for principal, R for the interest rate, T for the time period you borrow the money and I the dollar amount of interest paid.

This answer is the subjective opinion of the writer and not of FinancialAdvisory.com

5th Nov 2009 In Investing 2 Answers | 1951 Views
Subjects: effective interest rate, interest rate,

What is the effective interest rate?

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