Credit gives the word to pay either by repaying it or returning those resources later. In other words, this credit is the method of making the reciprocity formal, legally enforceable, and of course, extensible to a vast group of people who are not related.
However, the resources provided may be financial or have goods or services, like consumer credit. The credit covers any form of deferred payment. Credit generally gets extended by the creditor, the debtor or lender, and sometimes the borrower.
The effective interest rate means the equivalent annual interest rate which is annually compounded. This also means the interest rate that is earned actually on any investment or a loan throughout a year’s time, integrating compounding into the mix. Hence, the interest rate which has a base figure of 4% may turn out to be higher (effective interest rate), upon adding compounding into its calculation. This principle helps with the measurement of returns from various financial instruments and investments. The effective interest rate helps in differentiating between returns on loans with monthly compounding to those with quarterly compounding. They may also help with the comparison of returns from bonds.
The formula for calculating the effective interest rate is the following-
(1 + (nominal rate / number of compounding periods)) ^ (number of compounding periods) - 1
The effective interest rate on a home loan or mortgage can thus be different from the base interest rate. It will mean the actual interest rate paid on the loan and will add up to a different amount after accounting for compounding. It is the actual rate percentage for any home loan or mortgage, if one looks at the real estate or property sector.
