### What is the difference between the nominal and the effective interest rate?

The nominal interest rate is the interest rate the bank uses to calculate the interests you pay each month. The effective interest rate, also called the internal rate of return, also includes the loan fees, and therefore gives us a better understanding of the total loan costs. The more interest and principal you pay, the higher the effective interest rate. Also note that if you pay $100 twelve times a year, the effective interest rate will be higher than if you paid $1,200 once a year.

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