Rarely are loans and mortgages calculated annually. Knowing the EIR is important for many reasons.

1. There is no need to be concerned about the compounding method.

2. As a lender the EIR allows you to easily and quickly calculate your yield on a loan at the end of the year. A $100,000 loan with an EIR of 12.6825% gives the lender a return of $100,000 x 1.126825 = $112, 682.50. The EIR is required in order to calculate the Future Value of a series of payments using a financial calculator.

If you borrow $100,000 at 6% as shown below the Calculator interest the lender earns is $115,838.19 over the 30 years if he does nothing with the monthly payments but put them under his mattress. The lender actually trys to lends out your monthly payments each month (deemed reinvestment) and if every single payment is lent out over the 30 years the lender achieves the Future Value of $602,257 as shown below in the negative amortization schedule and the present value-future value calculator. Using 6% AIR as input to the financial calculator would give you the wrong answer for the deemed reinvestment.