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Highness but ima show you how to use the effect function to figure out the real or effective interest rate lets say for example that you are getting a car loan and theyre quoting you a nominal interest rate so you have to pay attention to this they give you a nominal interest rate of 4% so its point zero four and that is over a period of 12 months so you might think oh thats the real interest rate that Im paying but you have to take into account that maybe theyre going to compound that over 12 months and really the effective interest rate is a little bit more and thats why you have a difference between the nominal interest rate and the effective industry now the main difference between the nominal interest rate and effective interest rate is that the effective interest rate takes into account a compounding so also another example when you think about it is if you are saving and you have a savings account or some kind of investment account and they quote you a nominal interest