The term “effective rate” is used in two ways. It can refer to:

1. The actual rate that the borrower must pay on a loan after the effects of compounding are considered (This makes it different from the nominal interest rate.), and/or
2. The rate that reflects the borrower’s actual borrowing cost, after accounting for any cash back that is received.

Partial source: CAAMP

Last modified: December 18, 2012