The nominal APR is the stated annual interest rate. The Effective Annual Rate (EAR) accounts for how often interest is compounded within the year — more frequent compounding means a higher effective rate.
EAR = (1 + APR ÷ n)ⁿ − 1
Where n = number of compounding periods per year.
18% APR compounded monthly: EAR = (1 + 0.18/12)¹² − 1 = (1.015)¹² − 1 ≈ 19.56%. So a credit card with 18% APR actually charges about 19.56% per year.
Two loans with the same nominal APR but different compounding frequencies have different true costs. Always compare EAR, not just APR, when evaluating loan offers.