Effective interest rate

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The effective interest rate (EIR), effective annual interest rate, annual equivalent rate (AER) or simply effective rate is the percentage of interest on a loan or financial product if compound interest accumulates in periods different than a year.^[1] It is the compound interest payable annually in arrears, based on the nominal interest rate. It is used to compare the interest rates between loans with different compounding periods. In a situation where a 10% interest rate is compounded annually, its effective interest rate would also be 10%.^[1]