2 min read
Definition
The nominal interest rate is the annual rate a lender states without accounting for how often interest is applied. If a facility charges 1% a month, the nominal annual rate is 12% — but because interest compounds monthly, the effective annual rate is higher, around 12.7%.
In plain terms
It is the number on the tin, not the number in the till. Any time interest is charged more often than once a year, the nominal rate hides part of the cost.
Why it matters for your company
Ask whether a quoted rate is nominal or effective, and how often interest compounds. On short-term facilities the gap can be material. Compare on the effective figure using the true cost of borrowing calculator.
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Read →Funding for UK limited companies
Credicorp lends to your company, not to you personally — short-term working capital with no personal guarantee. See what your business could access.