How rate conversion works
Simple conversion just scales the rate by 12, treating interest as if it never compounds. Compound conversion instead finds the effective annual rate (EAR) — the rate that gives the same growth after 12 compounding periods.
- monthly — monthly interest rate (as a decimal)
- annual — annual interest rate (as a decimal)
More detail
Simple vs. compound conversion
Simple conversion is a quick estimate: a 1% monthly rate becomes 12% annual by just multiplying by 12. Compound conversion is more accurate for rates that actually compound monthly — the same 1% monthly rate becomes about 12.68% annual (EAR), because each month's interest also earns interest.
Which method should I use?
Use simple conversion for quoted "add-on" or flat rates that don't compound. Use compound (EAR) conversion for savings accounts, credit cards, and loans that compound monthly — it reflects what you actually earn or pay over a year.
Good to know. A monthly rate that looks small can compound into a much larger annual rate — always check whether a quoted rate compounds before comparing products.
Frequently asked questions
What's the annual rate for a 1% monthly rate?
Simple conversion gives 12% (1% × 12). Compound conversion (EAR) gives about 12.68%, since (1.01)^12 − 1 ≈ 0.1268 — enter 1 with "Monthly → Annual" and "Compound" above to see the exact figure.
Why does compound conversion give a higher annual rate than simple?
Compound conversion accounts for interest earning interest each month, so 12 monthly periods compound to more growth than a flat ×12. The gap grows with the rate — at low monthly rates the two methods stay close, but at higher rates compound conversion pulls further ahead.
How do I convert a 12% annual rate to monthly?
Simple conversion divides by 12, giving 1% monthly. Compound (EAR) conversion instead solves (1 + monthly)^12 = 1.12, giving about 0.95% monthly — select "Annual → Monthly" above and enter 12 to check.
Which method matches my savings account or loan?
Most bank products that compound monthly (savings accounts, credit cards, many loans) match the compound (EAR) method. Flat or "add-on" rate products, common in some short-term loans, match the simple method — check your product's terms to be sure.