Banks often use the terminology of nominal and APR to their clients. As a borrower or as an investor in money capital, however, one should know the main differences between the two terms.
The nominal annual interest
The nominal annual interest rate, often referred to as the nominal interest rate, is the interest rate that the bank demands from the borrower per year in the form of loans for borrowing or pays the investment amount per annum.
It is essential to know that the nominal interest rate basically refers to one calendar year.
The nominal interest rate is therefore always marked by the pa (Latin: per annum or per annum) by the bank.
For loans, such as loans, interest is paid monthly. However, the settlement period for the interest payments paid by the borrower to the bank during the year is basically the year.
At the end of the year, the borrower usually receives a so-called balance notification from the bank. Among other things, this contains information about how many interest payments the borrower made to the bank during the past year.
For investments, on the other hand, it is customary for the bank to credit the earned interest at the end of the investment year or the calendar year to the investor’s account.
The nominal interest always refers to the interest rate without the compound interest effect!
The annual percentage interest rate
The effective annual interest rate, also referred to as the effective interest rate, takes into account the compound interest effect. The annual percentage rate of interest relates in principle to the nominal interest plus the already remunerated interest.
The latter, however, earn interest again!
The annual percentage rate recieved
For all interest received during the year, regardless of whether it is credited to the investor monthly, quarterly or semi-annually, the investor receives interest again.
These interest rates on the respective interest credit increase the nominal interest rate.
This creates the APR, which is usually higher than the nominal interest rate.
Since most banks and credit institutions already offer monthly, quarterly or semi-annual interest credits, the customer can thus benefit from the APR.
All interim interest credits are therefore an effective means of effectively increasing the nominal interest rate of a credit.
Anyone wishing to use the compound interest effect through the effective interest rate in order to increase their interest income should therefore always prefer a bank account which pays interest during the year, ie on a monthly, quarterly or half-yearly basis.