How to Calculate Effective Interest Rate Using Excel

Updated on January 4, 2017

More explanations on the effective interest rate

There are three interpretations of what the effective interest rate is.

1 Explanation: The effective interest rate is the rate used in the calculation of compound. This means that the calculation of the effective interest rate is conversion of interest rate used to calculate interest by a simple method.

2 Explanation: The effective interest rate is the interest rate which in addition includes potential costs. Hence it is the discount rate at which the total sum of transfers and repayments calculated on the same day equal each other. Discounting is carried out with the compound mode.

3 Explanation: See: Calculate APR (Annual Percentage Rate) Using Excel

If you think that the first explanation is correct, then you have three options:

• Visit the website annualised agreed rate

• In Excel, you use the function EFFECT

• Use the formula: = ((1 + nominal interest rate/100/ number of billings) ^ (number of billings) -1) * 100

However,if you consider that the second explanation is correct you have two options:

• Visit the website Rate For Money

• Use the instructions that follow.

What is the effective interest rate: the interest rate that is applied to the compound method and comprising:

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EIR and Mortgage

Do you think the information on the effective interest rate is relevant for a mortgage loan?

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The inclusion of tax HOA and insurance in the EIR

Find the effective interest rate using Excel

In Excel, enter the date and amount of the receipt of the loan, the date and amount of the payment of any charges, and the dates and amounts of all refunds.

The data for the calculation of the effective interest rate

Calculate the number of days

Calculate the number of days of transfer credit to a refund

Determine baseline percentage

Enter a value of approximately

How well do you know the investment?

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Calculate the discount rate

The formula for calculating the discount rate is: ((1 + IR/100) ^ (Days / YearDays)).

IR - interest rate
Days - Number of days
YearDays - the number of days in a year

^ Character entered by holding down the left ALT and the numeric keypad enter the 94

Calculate discounted value

Amounts divided by the discount rate. If the number of days zero, the discounted amount equal to baseline.

Summing discounted payment

The sum needed for comparison with the transfer.

And Calculate the Difference Between the Transfer and the Sum Repayments

The difference tells us what is the real effective interest rate.

Now everything is ready to find the effective interest rate

We are looking for such a percentage, which is the difference close to zero. Example: 8, 14, 11, 12.5, 11.75, 12.125, 12.3125, 12.219, 12.266 ... 12.239. The smaller the difference, the more accurate the calculation we have.

That's all!

Mortgage Calculator With Effective Interest Rate

There are several different calculations of the effective interest rate method.

Do you think that the presented method right?

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Calculate APR (Annual Percentage Rate) Using Excel

We carry out calculation in two steps:

Step 1

Step 2

What is Effective Interest Rate?

One of the most important financial terms you should know

A better understanding of financial terms can truly help you make good and thoughtful decisions about managing your money. Without financial literacy it is not hard to accept wrong retirement plan, paying too high loan or mortgage payments or even accumulate bigger and bigger debt. Due to all these facts it is certainly very important to know, what an effective interest rate is and how can be calculated because it can help you compare different loans and other financial products. It is sometimes also named annual equivalent rate or EIR.

If someone wants to know, what the real costs of borrowing money from a bank or other financial institution would be, he or she should definitely calculate effective interest rate on a loan or mortgage. This is simply the best and the easiest way to compare different financial products and their true cost. Using that kind of calculation is really useful. It can help you get a clear picture and make a right financial decision!


The Simplest Way to Calculate Effective Interest Rate

Find out the real cost of borrowing money

It is absolutely important to have good financial knowledge, but even without it you can easily calculate effective interest rate that helps you find the most suitable way for borrowing money. Surely you want to know how much would you actually pay on it, but this is not always a simple task because there are many differences between credit, loan and mortgage opportunities. Not all of them have the same compounding and other terms, so it is hard to compare them and as a borrower you often do not know how many costs you would have all together. Effective interest rate calculator can surely help you with that!

All you should know for that kind of financial calculation are some basic information about your credit, loan or mortgage. You should only know what the compounding period is and the nominal rate of your loan or mortgage. The compounding period means the length of time from one payment of the loan or mortgage to the next and it can be monthly, quarterly or annually. The nominal rate is also called stated interest rate and it is expressed as a percentage per year. All information you need for calculation of effective interest rate is easy to get because it has to be given by the lender of a credit, loan or mortgage (this usually means a bank) and written in contract or other documents.

After you have all necessary information, simply type them in effective interest rate calculator that can be found online and in a few seconds you will find out truly the best option for borrowing money. The calculator shows you which option has the lowest effective interest rate. The lowest rate means that a credit, loan or mortgage has lower costs than other financial products, so it is the best and the most inexpensive option for you.

With a little help of effective interest calculator a borrower can quickly get a whole picture of his or her financial options and can easily find out certainly the most suitable credit, loan or mortgage without gaining some special financial knowledge, so do not hesitate to use it!

Comparison of simple interest rate and compound interest rate depending on the number of payments per year.

Effective Interest Rate – Why it is so important?

Take your financial future into your hands!

Making a smart financial decision is absolutely crucial for your future and for future of your family and children. There are so many financial choices available that an ordinary person without wide financial knowledge often does not know which one to choose. What is the best way for saving and investing money and how to borrow it without too expensive cost? Maybe you are buying a new home and have questions about mortgages or you want to know how to make a good retirement plan? All that questions are very important and knowing, what an effective interest rate is and how can be used will definitely help you find answers to them and you will be better prepared for making decisions about your financial future.

Nobody wants accumulate a debt or pay to much money for new property or something else. Learning about effective interest rate can help you avoid financial trouble because it is truly the simplest way to compare different financial products. For example, if you need a loan, different banks offer various options and terms. Some loans can be very expensive and a customer would have to pay a lot more money to the bank than the bank would give it to him or her. This means big financial costs.

Before you decide to borrow some money from a bank, not only read their terms, but also calculate effective interest rate. It will tell you, how expensive your loan or mortgage really is and after the calculation you can quickly compare different financial options and find the most suitable one for yourself. You want to get as lowest effective interest rate as possible!

The equation of Effective Interest Rate

All about Effective Interest Rate

How much can I borrow and how much would that cost me

Find an easy to use online calculator that can provide you with information about effective interest rate on your loan or mortgage! That would tell you how much money you can borrow without having too many costs.

Effective interest rate is a rate that can give you a whole picture of different financial options you have. It is surely the best for you to find a lender that offers very low effective interest rate, because that means smaller costs for you. Effective interest rate can tell you, how much exactly would you have to pay for your loan and you can use this information for comparing.

Every bank offers a variety of options for borrowing money, but some of them are better than others. You can find out the most suitable one with the help of effective interest rate!

Effective interest rate - Example

discount rate
discounted value
effective interest rate


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    • Usemybee profile image

      Jozef 4 years ago from Slovenia

      Thanks Aki.

      I really appreciate you taking the time to share your insights and feedback.

    • profile image

      Aki 4 years ago

      You can find EIR at the end by using option "Goal seek" in data tab...

      Much easier. :)

      Good text, tnx...