<p>The <strong>Effective Annual Interest Rate (EAIR)</strong> is the actual interest rate paid on a loan or earned on an investment, taking into account the effect of compounding. It's the rate that, when applied to the principal amount, results in the same total amount as the nominal interest rate compounded over the same period.</p>

<h2>How It Works</h2>
<p>The EAIR is calculated using the formula:</p>
<p><em>EAIR = (1 + i/n)^(n*t) - 1</em></p>
<p>Where:</p>
<ul>
  <li><strong>i</strong> is the nominal annual interest rate</li>
  <li><strong>n</strong> is the number of compounding periods per year</li>
  <li><strong>t</strong> is the time in years</li>
</ul>
<p>For example, if a loan has a nominal annual interest rate of 10% compounded quarterly, the EAIR would be:</p>
<p><em>EAIR = (1 + 0.10/4)^(4*1) - 1 = 10.381%</em></p>

<h2>Why It Matters</h2>
<p>The EAIR is crucial for understanding the true cost of borrowing or the true return on investment. It helps consumers and investors make informed decisions by providing a clear picture of the actual interest rate they will pay or earn. For instance, a credit card with a 18% APR compounded monthly has an EAIR of approximately 18.77%, which is the actual rate applied to the balance each year.</p>