Nominal Interest Rate
The nominal interest rate (NIR) is the stated interest rate on a loan or investment, which is usually expressed as an annual percentage rate (APR). Also called nominal APR, it’s an annualized rate which does not include compounding. The United States Truth in Lending Act requires disclosure using the nominal APR, and it is used as a standard rate in many other countries.
Formula:
Nominal APR = i x n
Where:
i = the periodic interest rate
n = the number of periods per year
For example, if you are charged 1% monthly interest, your nominal APR would be:
APR = 1% × 12 = 12%
The nominal APR, however, may still be subject to compounding and variable rate adjustments, so it’s important to fully understand the terms of the loan agreement.
The EIR, or effective interest rate, also known as effective APR, effective annual rate (EAR), or annual equivalent rate (AER), takes into account the effect of compounding.
Financial Glossary
Use Lighter Capital's glossary to understand common terms used in finance and investing, so you can build financial literacy and make informed decisions for your startup.
Nominal Interest Rate
The nominal interest rate (NIR) is the stated interest rate on a loan or investment, which is usually expressed as an annual percentage rate (APR). Also called nominal APR, it’s an annualized rate which does not include compounding. The United States Truth in Lending Act requires disclosure using the nominal APR, and it is used as a standard rate in many other countries.
Formula:
Nominal APR = i x n
Where:
i = the periodic interest rate
n = the number of periods per year
For example, if you are charged 1% monthly interest, your nominal APR would be:
APR = 1% × 12 = 12%
The nominal APR, however, may still be subject to compounding and variable rate adjustments, so it’s important to fully understand the terms of the loan agreement.
The EIR, or effective interest rate, also known as effective APR, effective annual rate (EAR), or annual equivalent rate (AER), takes into account the effect of compounding.
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