Nominal interest rate
The nominal interest rate is the percentage the bank charges on the outstanding balance, and it's the figure used directly to calculate the monthly payment of a mortgage or loan.
The nominal interest rate is the annual percentage a bank charges for lending money, without factoring in fees or other costs. It's the input used in the standard amortization formula (the most common repayment method for mortgages and personal loans) to calculate the constant monthly payment made throughout the life of the loan.
The nominal rate doesn't include opening fees or mandatory costs, so it doesn't reflect the real cost of the loan on its own — that's what APR is for, since it does include them. An attractive nominal rate can come with fees that push the APR up considerably, so it's worth checking both figures before deciding.
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Frequently asked questions
What exactly is the nominal interest rate?
It's the annual interest rate a bank applies to the outstanding balance of a loan or mortgage, not including fees or other associated costs.
Why is the nominal rate usually lower than the APR?
Because the nominal rate only reflects pure interest, while APR adds the loan's fees and mandatory costs, which makes APR equal to or higher than the nominal rate almost always.
How does the nominal rate affect the monthly payment?
It's one of the inputs of the amortization formula (along with the principal and term): a higher nominal rate means a higher monthly payment for the same principal and term, and a larger share of interest in the earliest payments.