Platform Terms · Basic level · 3 min read ·
What does EAR (Effective Annual Rate) mean?
E.A. stands for Efectivo Anual, Colombia's effective annual rate. It is an annual rate that already accounts for compounding: it states a full year's result in a single number, given that what each period generates goes on to generate in the next. Two rates only compare directly when both are expressed as E.A.
In 30 seconds
- E.A. already includes compounding: it is not the monthly rate times twelve.
- Converting E.A. to monthly uses the twelfth root, not a division by twelve.
- In Colombia, the usury rate, the DTF and the cost of credit are expressed as E.A.
Why should you care?
Rates are quoted per month, per quarter or per year. E.A. puts them all in the same unit.
- You compare two figures knowing they speak the same language.
- You read the real cost of any credit settled month by month.
- You understand what you are looking at on each project sheet before deciding.
Think of it as a snowball
A rolling snowball doesn't grow by the same amount each turn: every turn picks up more snow because it is already bigger. The monthly rate is the size of each turn. E.A. is the size of the ball at the end of the year.
How does the effective annual rate (E.A.) work?
- 1
Take the period's rate
For example, 1% per month. Write it as a decimal: 0.01.
- 2
Count the periods in a year
Monthly is 12, quarterly is 4, semi-annual is 2.
- 3
Compound and subtract 1
Add 1 to the rate, raise it to the number of periods and subtract 1. That is the full-year result.
The formula
E.A. = (1 + i)ⁿ − 1
- i
- = rate per period, as a decimal
- n
- = number of periods in a year
An example with numbers
As plain arithmetic, unrelated to any project: a 1% monthly rate, carried over a year.
| Monthly rate | 1% |
|---|---|
| Multiplied by 12 | 12% |
| Expressed as E.A. | 12.68% |
| Difference from compounding | 0.68 points |
Multiplying by twelve falls short, because it ignores that each month's result also generates.
Try it with your numbers
- Multiplied by 12
- 12%
- Expressed as E.A.
- 12.68%
- Difference from compounding
- 0.68 points
Rate arithmetic, unrelated to any project.
Where do you see it at Circular Urban?
Each project sheet shows its estimated return as E.A., in the Profitability section, before you formalize anything. It is a non-binding reference projection, built on the project's operating assumptions: the outcome of your participation is subject to the project's actual performance and to the terms of the participation agreement.
- Each project sheet, in the Profitability section.
- The project simulator, when you choose how much to participate with.
- The project's management reports.
What changes in your finances once you get it
You compare by the same rule
"2% per month" and "25% per year" look close. As E.A., the first is 26.82%.
You read the real cost of credit
A rate settled every month costs more over the year than multiplying it by twelve suggests.
You see why time matters
Compounding explains why the same percentage yields differently depending on the term.
Common mistakes
- Myth
12% E.A. is the same as 1% per month.
- In reality
12% E.A. works out to 0.9489% per month. And 1% per month works out to 12.68% E.A.
- Myth
To go from E.A. to monthly, just divide by twelve.
- In reality
It uses the twelfth root: monthly rate = (1 + E.A.)^(1/12) − 1.
- Myth
A project's projected E.A. is a fixed figure.
- In reality
It is a non-binding reference projection. The outcome depends on the project's actual performance.
Test yourself
A rate is 2% per month. What is it as E.A.?
Keep learning
Helps to know first
This content is educational. Every participation carries risks inherent to the project, including the possibility of partial or total loss, and results are subject to each project's actual performance.
