Effective Annual Rate
Effective Annual Rate (EAR) is a term to indicate the actual interest generated in 1 year because of the effect of compounded interest (compounding effect; read more).
You can use this formula to calculate EAR:
The difference in overall returns will be different if you use the calculation of flat and compounded interest. Please see the following simulation:
- Lending Amount: IDR 10.000.000
- Interest Rate: 10% per Year,
- Compounding Period: Monthly
With an ideal condition such as reallocating principal + interest to other loans with similar interest rates by assuming that the fund is immediately been allocated (no waiting time), here is the simulation of the comparison of your yield, using both flat and compounded interests.
10% annual interest rate, returns are revested every month
|No.||Simple Interest||Compounded Interest|