The Effective Annual Rate (EAR) is the interest rate that is annualized using compound interest, as opposed to using simple interest in the case of the Annual percentage rate (APR). The EAR is the annualized equivalent of interest with shorter compounding periods. It can be calculated from the APR as follows: Annual Percentage Rate (APR) is an expression of the effective interest rate that will be paid on a loan. ...
EAR = ((1 + (APR / m)) ^ m) - 1 or EAR = ((1 + r)^m) - 1
where m is the number of times (or periods) interest is compounded during the year and r is the interest rate per period. For example, if interest is compounded monthly, m = 12.
In Canada, interest on mortgages is compounded semi-annually instead of monthly. For Canadian EAR calculations, use m=2.
Annual Percentage Rate (APR) is an expression of the effective interest rate that will be paid on a loan, taking into account one-time fees and standardizing the way this rate is expressed.
These rates are all equivalent, but to a consumer who is not trained in the mathematics of finance, this can be confusing.
APR helps to standardize how interest rates are compared, so that a 10% loan is not made to look cheaper by calling it a loan at "9.1% annually in advance".
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