APR meaning: the nominal rate
The nominal rate is the yearly rate a bank or lender quotes before compounding is counted. In loan and card offers it is often called APR (annual percentage rate). It is a headline figure. It tells you the yearly rate, but not how often interest is added to the balance.
Compounding means interest is added to the balance, and later interest is then charged or paid on that larger balance. The more often this happens in a year, the more the final result moves away from the nominal rate.
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APR vs APY: what the effective rate adds
The effective annual rate (EAR) shows what actually happens to a balance over one full year once compounding is included. On savings products it is often called APY (annual percentage yield). APY and EAR are the same idea under different names.
- APR / nominal rate: the quoted yearly rate, without compounding.
- APY / EAR: the real yearly growth of the balance, with compounding.
When interest is added only once a year, the two rates are equal. When interest is added monthly or daily, the effective rate is higher than the nominal rate. Banks often advertise APY on deposits because it is the higher number. On loans they often show APR because it is the lower number.
Effective annual rate formula
Use these terms:
- r is the nominal annual rate, written as a decimal.
- n is the number of compounding periods in a year: the number of months for monthly compounding, the number of days for daily compounding.
- r/n is the periodic rate, which is the rate applied in each period.
Start with any balance, B_start. Apply the periodic rate r/n to the balance at the end of each period and add the interest to it. Repeat this for all n periods. The balance you reach is B_end.
EAR = (B_end − B_start) ÷ B_start
Written as a single expression, this is the familiar (1 + r/n)^n − 1.
The size of B_start does not matter, because the result is a rate. A short calculation in a spreadsheet gives the same answer as the formula. The deposit calculator below also does it for you.
Fill in the empty fields to see the result.
Simple: P × r × t. Compound: interest is added to the balance each period; effective annual rate = (1 + r/n)^n − 1. Tax is withheld each time interest is credited.
Enter the nominal rate, the term and the compounding frequency. The calculator shows the interest earned, the effect of tax on interest and of top-ups, and the effective annual rate. Do your examples there rather than relying on rounded figures from adverts.
Why the same nominal rate gives different results
Two offers can both quote the same nominal rate and still pay different amounts. The usual reasons are:
- Compounding frequency. Monthly compounding beats yearly compounding at the same nominal rate. Daily compounding beats monthly.
- Simple vs compound interest. Some term deposits pay simple interest. The profit is paid out and is not added to the balance, so nothing compounds. See Compound Interest.
- Payout vs reinvestment. Monthly profit that is withdrawn does not compound. Monthly profit that stays in the account does.
- Tax on interest. Withholding tax reduces the amount that can compound. Compare after-tax results.
- Fees and charges. On loans, processing fees and insurance raise the true cost above the APR. See Effective Loan Rate.
- Day-count and term. A rate on a deposit shorter than a year has to be annualised before you compare it with a yearly rate.
Islamic accounts quote an expected profit rate instead of interest. The comparison works the same way: check how often profit is credited and whether it is reinvested. See Islamic finance.
How to compare offers
- Convert every offer to an effective annual rate on the same basis.
- Use after-tax figures for deposits and all-in cost for loans.
- Check whether the rate is fixed or can change. Many bank rates move with the policy rate. The latest decision on record is: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Before you use any rate, check the current figure and its date on the official State Bank of Pakistan website. Context is on SBP rates and economy.
- Compare the effective rate with inflation to see the real return. See Inflation and Savings.
- Read the product terms for rules on early withdrawal or early repayment.
This page explains how the rates work. It is not a recommendation of any bank, scheme or product. For specific products, see Deposit Interest and National Savings schemes.
Credit cards and overnight trading costs
Credit card rates are usually quoted as a monthly or yearly nominal figure. Unpaid balances compound, so the effective cost is higher than the quoted figure. See Credit Card Interest.
Leveraged forex and CFD positions held overnight carry a financing charge called swap, which is covered on Swap fees. Leveraged trading can lose money fast, and financing costs add to those losses.
Frequent questions
Is APR the same as the effective annual rate?
Only when interest is added once a year. With more frequent compounding, the effective rate is higher than the APR.
Is APY the same as EAR?
Yes. Both describe the yearly growth of a balance with compounding included.
Why does monthly compounding pay more?
Each month's interest is added to the balance, so the following months earn interest on a larger amount.
Does simple interest have an effective rate?
On a one-year deposit that pays simple interest, the effective rate equals the nominal rate, because nothing compounds within the year.
Where can I get current official rates?
Use the official State Bank of Pakistan website and note the date of each figure. For calculations, use the tools on Calculators.