Interest rate converter
A rate is not a rate until you say how often it compounds. 12% a year charged monthly is 12.68%, and the law makes lenders print the second figure for exactly that reason. Nothing you type here leaves your browser — it is worked out on your own device, so there is nothing to send and nothing to log.
A rate is not a rate until you say how often
12% a year, compounded monthly means 1% a month — and after twelve months you have 12.683%, because each month's interest earns interest afterwards. Compounded daily it is 12.747%. Compounded continuously, 12.750%, and that is the ceiling: no frequency beats it.
So “12%” on its own is not an answer to anything. It is the nominal rate, and it is not comparable between two products that compound differently. That is precisely why the law makes lenders and banks print an effective figure instead.
AER, APR, APY and the nominal rate
| AER | Annual Equivalent Rate. UK savings. An effective rate: what a year actually leaves you with. Required on savings advertising so accounts can be compared. |
|---|---|
| APR | Annual Percentage Rate. UK and EU borrowing. An effective rate that also includes compulsory fees, which is why a loan's APR is higher than its interest rate. |
| APY | The American word for AER. Same idea, same arithmetic. |
| Nominal | The rate before compounding is accounted for. Not comparable between products, which is the whole reason the others exist. |
Compounding has a ceiling
Going from yearly to monthly compounding on a 12% rate gains you 0.68 percentage points. Going from monthly to daily gains 0.065. Going from daily to continuously, infinitely often gains 0.0022. The returns diminish fast, and the limit is er − 1.
Which means “compounded daily!” on an advertisement is worth almost exactly nothing over monthly, and saying so is the honest version.
Watch for the flat rate
Some lending — car finance especially, and a great deal of credit outside the UK — is quoted as a flat rate: the interest is calculated on the original amount for the whole term, even though you are paying the balance down as you go. A 5% flat rate over five years is roughly a 9% APR, because on average you only owe about half of what you borrowed.
A flat rate is not a compounding frequency and this page cannot convert it — it depends on the repayment schedule. The loan calculator works from the actual payments, which is the only honest way.
What a rate does not include
Not tax: a 5% savings rate is 4% after basic rate tax if you are outside an ISA and past your personal savings allowance. Not inflation: 5% in a 5% inflation year has bought you nothing at all. And not the fact that almost every real savings rate is variable, and almost every advertised one has an introductory period attached. This is arithmetic, not financial advice.
What it will not do
- It will not work out an APR including fees. That needs the fee schedule and the repayment dates, and is the loan calculator's job.
- It will not convert a flat rate. See above.
- It will not account for tax, inflation or the rate changing, which between them matter more than the compounding frequency.