Effective annual rate

Imagine you have a piggy bank that gives you some money each month if you leave your money in it for the whole year. But, the piggy bank might take a small piece of your money each month as a fee - this is called the interest rate.

Now, the effective annual rate is the final amount of money you end up with after you add up all the money you get each month and subtract the fees. This is a better way to understand how much money you really earn in a year, instead of just looking at the interest rate for one month.

So, if you want to know how much money you will have at the end of the year, you should use the effective annual rate. It helps you find out the real amount of money you will make after considering all the fees and rewards over the course of a whole year.