Nominal Interest Rate

Updated: 29 February 2024

What Does Nominal Interest Rate Mean?

The nominal interest rate of a loan or investment is its interest rate with no regard for inflation. The nominal interest rate represents the numerical value of the interest but may not reflect its changing purchasing value.

Insuranceopedia Explains Nominal Interest Rate

The nominal interest rate is what financial institutions provide a client for a transaction like a loan. It is fixed until the transaction is finished. A loan of $10,000 with a nominal annual interest rate of 5% will be paid in full with $10,500, assuming it is paid off at the first year mark. For the lender, however, the real interest is lower if there is inflation, and while they may make a $500 profit, that $500 may not be worth as much as it would have been on the date it was issued.

Related Reading

Go back to top