What Is the Effective Annual Interest Rate?
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Key terms
- Interest RateThe percentage charged by a lender for borrowing money, or earned on savings and investments. Can be fixed or variable depending on the financial product.
- Annual Percentage Rate (APR)The yearly cost of borrowing money, including interest and fees, expressed as a percentage. APR provides a complete picture of loan costs beyond just the interest rate.
- Effective Tax RateThe average rate at which your total income is taxed, calculated by dividing total tax paid by total taxable income. It is always lower than your marginal tax rate because the US uses a progressive tax system.
- Annual Percentage Yield (APY)The real rate of return earned on an investment, taking into account the effect of compounding interest. APY is typically higher than the stated interest rate.
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