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Estimates an annualised cost including fees so you can compare offers like-for-like. Illustrative, not a statutory APR.
The two numbers, side by side
The nominal rate is the quoted annual figure, ignoring in-year compounding. The effective annual rate folds the compounding in. The formula is EAR = (1 + r/n)^n − 1, where r is the nominal rate and n the number of compounding periods a year.
A worked example that catches people out
A facility charging 2% a month sounds like 24% a year. But because each month’s interest compounds, the true cost is (1.02)^12 − 1 = 26.8% EAR. On a £20,000 balance held all year that is roughly £5,360, not £4,800 — a £560 difference from compounding alone.
Where the gap bites hardest
The more often interest compounds, the wider the gap. Daily-accrual overdrafts and revolving lines compound most; annually-charged term loans least. Always ask how often interest is applied before comparing two rates.
Convert before you compare
Put every quote on an effective annual basis, or on total amount payable, before choosing. The calculator below helps you see the real cost of a balance over a year.
Where Credicorp fits
Credicorp lends to your company, not to you personally, and takes no personal guarantee. See indicative terms on business loans, or apply online in minutes.
See effective annual rate and how compounding frequency changes borrowing cost.
Frequently asked questions
Is the effective rate always higher than the nominal rate?
Yes, whenever interest compounds more than once a year. If interest compounds only annually, the two are equal.
Which rate should I compare on?
The effective annual rate, or the total amount payable in pounds. Comparing two nominal rates that compound differently is misleading.
Why do lenders quote nominal rates?
They are simpler and look lower. That is exactly why you should convert to the effective rate before deciding.
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