We are independent & ad-supported. We may earn a commission for purchases made through our links.

Advertiser Disclosure

Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.

How We Make Money

We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently from our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Are the Applications of Nominal Interest Rates?

Helen Akers
Updated Feb 28, 2024
Our promise to you
WiseGEEK is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGEEK, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The term "nominal interest rates" is generally used in one of two ways: to describe the rate of return on an investment or the amount of interest charged on a loan. It can be thought of as the quoted interest rate. If a bank states that it charges 6 percent interest on a 15 year mortgage, 6 percent is the nominal interest rate. Likewise, the nominal rate for a savings account is the additional interest it yields as a percent of the total saved. Nominal interest rates are not adjusted for inflation.

Many individuals use nominal interest rates to figure out how much they will earn on an investment. For instance, if someone makes an initial deposit amount of $1,000 US Dollars (USD) that earns 10 percent annual interest, he will gain $100 USD. The interest payment is added to the initial deposit, bringing the account balance to $1,100 USD. In the second year, the investor continues to earn 10 percent interest on the new balance, resulting in additional interest earnings of $110 USD, and bringing the total to $1,210 USD.

An issue with using nominal interest rates to calculate earnings is that inflation is not taken into account. Assuming an inflation rate of 5 percent, the real earnings in the above example would be reduced to $50 USD in year one and $52.50 USD in year two. Since inflation reduces the spending power of money, the value of $1 USD decreases over time. It takes more money to obtain the same types of goods, which is why relying on the nominal interest rate might be misleading.

If for some unlikely reason inflation remains at zero, nominal interest rates would be a correct estimate of earnings. One of the reasons why some investors take larger risks with the stock market is to obtain a high nominal interest rate. This high rate helps offset the cost of inflation in the long run. For example, a stock portfolio that yields an average return of 15 percent over 30 years is considered normal or adequate.

Nominal rates also reflect the cost of borrowing. If a consumer takes out a car loan for $10,000 USD and pays $500 USD in interest payments the first year, the nominal rate is 5 percent. The lender assumes the risk of inflation outpacing the interest rate, as well as the risk of payment default. In the United States, nominal interest rates can be influenced by the costs of borrowing from the Federal Reserve, macroeconomic conditions, and an individual's credit history.

WiseGEEK is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Helen Akers
By Helen Akers , Former Writer
Helen Akers, a talented writer with a passion for making a difference, brings a unique perspective to her work. With a background in creative writing, she crafts compelling stories and content to inspire and challenge readers, showcasing her commitment to qualitative impact and service to others.

Discussion Comments

Helen Akers

Helen Akers

Former Writer

Helen Akers, a talented writer with a passion for making a difference, brings a unique perspective to her work. With a...
Learn more
WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGEEK, in your inbox

Our latest articles, guides, and more, delivered daily.