What is the effective annual interest rate?

The effective annual interest rate is an important indicator that provides an accurate measure of the total cost of a loan. This value is expressed as an annual percentage of the loan amount. It is particularly useful because it not only considers the nominal interest rate but also includes all additional costs that may arise in connection with the loan. These may include processing fees and brokerage costs. Therefore, the effective annual interest rate offers a more comprehensive representation of the actual cost of a loan for the borrower, enabling a more direct comparison of loan offers.