Consumer loans · 11 toukokuun, 2026
Effective annual rate vs. nominal rate – What is the real cost of a loan?
The effective annual rate is the only number that lets you reliably compare different loans. Read what it consists of and how it differs from the nominal rate.
When comparing loan prices, many look at the nominal interest rate first – but it doesn’t tell the whole story. The effective annual rate is the only number that lets you reliably compare different loans. In this guide we explain what it consists of, how it differs from the nominal rate, and why it determines the final cost of a loan.
What is the nominal interest rate?
The nominal rate is the base rate stated in the loan agreement that the lender charges annually. For example, if the nominal rate is 5%, you pay 5% of the loan principal as interest per year.
The nominal rate does not include other loan costs, so it makes the loan look cheaper than it is.
What is the effective annual rate?
The effective annual rate (EAR) includes all loan costs:
- Nominal interest rate
- Any opening fee or arrangement fee
- Monthly or account maintenance fees
- Other mandatory costs
The EAR is a regulated figure that all lenders in Finland must disclose transparently. It lets you compare total loan costs on the same scale.
Example: nominal rate vs. effective annual rate
Let’s take a €10,000 loan with a 5-year repayment period.
Loan A
- Nominal rate: 4.9%
- Opening fee: €200
- Monthly fee: €6/month
- Effective annual rate: 8.1%
- Total interest costs: approx. €2,198
Loan B
- Nominal rate: 7.5%
- Opening fee: €0
- Monthly fee: €0/month
- Effective annual rate: 7.5%
- Total interest costs: approx. €2,026
Although Loan A’s nominal rate (4.9%) looks clearly cheaper, in reality Loan B (7.5%) is over €170 cheaper thanks to no monthly fees.
Why is the effective annual rate important?
The EAR is a standardised comparison figure regulated by EU directive. With it:
- You can compare offers from different lenders on the same scale.
- You cannot be misled by an attractive nominal rate.
- You can evaluate the total cost of a loan.
- You can see how much the loan really costs over the repayment period.
What is the EAR made of in practice?
The lender is legally required to provide a representative example for every loan offer. The example includes:
- Loan amount
- Repayment period
- Effective annual rate
- Estimated monthly installment
- Total cost of the loan
On Lainafy comparison, the representative example is shown for each loan in the ”Show details” section.
Frequently asked questions
Is the effective annual rate always higher than the nominal rate?
In practice almost always yes, because the EAR adds all loan costs. If the loan is completely fee-free (no opening or monthly fees), the EAR can equal the nominal rate.
Why does the effective annual rate vary individually?
Lenders make a personal credit decision that determines your individual rate. The ”rate from” figure shown in ads is the best possible, and your actual rate may be higher depending on credit rating.
Can I trust the effective annual rate?
Yes – the EAR calculation is strictly regulated by the EU directive and Finnish consumer protection law. All lenders in Finland must use the same formula.