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Simple English definitions for legal terms
effective rate
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A quick definition of effective rate:
Effective rate refers to the interest rate that is actually paid or earned on a loan or investment. It takes into account any fees or charges associated with the loan or investment, giving a more accurate representation of the true cost or return. Essentially, it is the rate that reflects the total cost or benefit of the loan or investment.
A more thorough explanation:
The effective rate is the same as the interest rate. It is the percentage of interest that is charged on a loan or earned on an investment over a period of time.
If you borrow $1,000 at an interest rate of 5% per year, the effective rate is also 5%. This means that you will pay $50 in interest over the course of one year.
Another example is if you invest $1,000 in a savings account that pays 2% interest per year. The effective rate is also 2%, which means that you will earn $20 in interest over the course of one year.
These examples illustrate that the effective rate is the same as the interest rate and is used to calculate the amount of interest paid or earned over a period of time.