Can anyone explain “simple interest rate” vs “effective interest rate”?
For loans with fixed term e.g. car loans.
In: Economics
Simple interest is just the interest rate x principal without compounding. Effective includes compounding.
So if you had a two year investment for $100 at 5%, the second year interest payment would calculated on $105 (100+5 from the interest in year 1) so you would get $5.25 interest in year 2.
Therefore 5% Simple Interest but your Effective was slightly higher.
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