Periodic Rate

Interest rates are usually quoted per year, but interest is often calculated and added more frequently. The periodic rate is the rate for each of those shorter periods. It is usually found by dividing the annual nominal rate by the number of periods in a year.

For example, a credit card with an annual rate of 18% that charges interest monthly has a periodic rate of 1.5% a month. A savings account paying 4% a year with interest added quarterly has a periodic rate of 1% a quarter.

Periodic rates are what loan and savings calculations actually use. Monthly mortgage payments, for instance, are calculated using the monthly periodic rate and the number of monthly payments.

Because interest compounds each period, the true yearly cost is a little higher than the quoted annual rate. A periodic rate of 1.5% a month, compounded over twelve months, works out to about 19.6% a year. That is why effective rates such as the APY or effective annual rate are used to compare products fairly.