What the nominal rate is
The nominal rate is the figure most commonly seen in financial product advertising: "savings account at 3% nominal", for example. It's a simple annual percentage that doesn't by itself reflect how often interest is actually applied throughout the year.
What the APR is
The APR (Annual Percentage Rate) captures the real effect of compounding: if interest is paid and reinvested monthly instead of once a year, the effective result is slightly higher than the advertised nominal rate. In many products, the APR also includes fees, which is why it's usually the more honest figure to compare.
A numeric example
A 7% nominal rate, compounded monthly, produces an effective APR of approximately 7.23%. The difference between the two seems small, but over a large capital and many years, it shows up in the final result.
| Compounding frequency | Effective APR (7% nominal) |
|---|---|
| Annual | 7.00% |
| Semi-annual | 7.12% |
| Monthly | 7.23% |
| Daily | 7.25% |
Why it matters for compound interest
When comparing savings or investment products, only looking at the nominal rate can lead you to underestimate (or in some cases overestimate) the real result. The APR is the figure that's actually worth using as a reference for long-term projections, precisely because it already accounts for the compounding effect that drives compound interest growth.
Which number to use in the calculator
If you have the APR for your product, that's the most reliable figure to enter directly as "expected return" in the calculator. If you only have the nominal rate and know the compounding frequency, the result will be very similar unless that frequency is unusual (for example, annual compounding with monthly contributions, which gives a slightly different result than monthly compounding).